GSEB Class 12 Accounts Solutions Chapter 6 Retirement or Death of a Partner

Question 1. Select Appropriate Alternative for Each Question:

 

Question 1. (1) Debit balance of profit and loss account shown in the balance sheet at the time of retirement of a partner is
(A) recorded on the debit side of all partners' capital accounts including the retiring partner in their old profit-loss sharing ratio.
(B) recorded on the credit side of all partners' capital accounts including the retiring partner in their old profit-loss sharing ratio.
(C) credit side of the retiring partners' capital account only.
(D) debit side of the remaining partners' capital accounts in their gaining ratio.
Answer: (A) The debit balance of the profit and loss account, when a partner retires, is transferred to the debit side of all partners' capital accounts, including the retiring partner, based on their established old profit-loss sharing ratio.
In simple words: When a firm has a loss (debit balance in P&L), it's distributed among all partners, including the one leaving, according to their original profit-sharing agreement.

🎯 Exam Tip: Understanding the correct accounting treatment for undistributed profits and losses is crucial. Debit balances (losses) decrease capital, while credit balances (profits) increase it.

 

Question 1. (2) Goodwill shown in the balance sheet at the time of the retirement of a partner is recorded as
(A) shown in new balance sheet, if decided by partners.
(B) debit side of all partners' capital accounts in their old profit-loss sharing ratio.
(C) credit side of all partners' capital accounts in their old profit-loss sharing ratio.
(D) debit side of retiring partners' capital account only.
Answer: (B) Goodwill appearing in the balance sheet at the point of a partner's retirement is written off by debiting all partners' capital accounts (including the departing partner's) in their pre-existing profit-loss sharing ratio.
In simple words: Existing goodwill on the balance sheet is treated as an accumulated profit, so it's distributed among all partners (including the one retiring) in their old profit-sharing ratio by debiting their capital accounts.

🎯 Exam Tip: Distinguish between existing goodwill (written off) and new goodwill (valued at retirement) in accounting treatments. Their recording methods differ significantly.

 

Question 1. (3) Goodwill payable to the retiring partner is recorded as
(A) credit side of all partners' capital accounts, in their old profit-loss sharing ratio.
(B) credit side of all partners' capital accounts, in their gaining ratio.
(C) debit side of continuing partners' capital accounts, in their gaining ratio.
(D) debit side of continuing partners' capital accounts, in their new profit-loss sharing ratio.
Answer: (C) The goodwill amount due to a retiring partner is recorded by debiting the capital accounts of the continuing partners in their gaining ratio.
In simple words: The partners who benefit from the retiring partner's exit (the ones whose share of future profits increases) compensate the retiring partner for their share of goodwill. This compensation is reflected as a debit to their capital accounts.

🎯 Exam Tip: The gaining ratio is crucial for calculating the distribution of new goodwill among continuing partners, reflecting how they acquire the retiring partner's share.

 

Question 1. (4) When only old profit-loss sharing ratio is given, gaining ratio of remaining partners will be
(A) 1:1
(B) old ratio
(C) capital ratio
(D) can not be calculated
Answer: (B) When only the old profit-loss sharing ratio is provided, and no further information regarding the new ratio or specific gains/sacrifices is given, the gaining ratio of the remaining partners will be considered the same as their old profit-loss sharing ratio among themselves.
In simple words: If nothing else is stated, the remaining partners share profits and losses, and thus gain, in their existing proportion after one partner leaves.

🎯 Exam Tip: This is a common assumption in partnership accounting problems; always check for explicit new ratios or gaining ratios before applying this default rule.

 

Question 1. (5) A partner, except the retiring partner also receives goodwill when
(A) his capital is more.
(B) new share in new profit-loss sharing ratio is more than his old share.
(C) new share in new profit-loss sharing ratio is less than his old share.
(D) new share and old share are equal.
Answer: (C) A partner (other than the retiring partner) receives goodwill when their new share in the profit-loss sharing ratio is less than their old share, indicating a sacrifice.
In simple words: If a continuing partner's share of profits goes down after another partner retires, they are sacrificing a portion of their old share and should be compensated with goodwill.

🎯 Exam Tip: A sacrifice by a continuing partner means they also need to be credited with goodwill, similar to the retiring partner, for giving up a portion of their future profit share.

 

Question 1. (6) Loss of revaluation account at the time of retirement or death is recorded in __________ account in __________ ratio on __________ side of the capital accounts.
(A) remaining partners, new profit-loss sharing, debit
(B) all partners, old profit-loss sharing, credit
(C) all partners, old profit-loss sharing, debit
(D) all partners, equal proportion, debit
Answer: (C) A loss from the revaluation account at the time of a partner's retirement or death is allocated to the capital accounts of all partners (including the retiring/deceased partner) in their old profit-loss sharing ratio, appearing on the debit side.
In simple words: Any loss from revaluing assets and liabilities at the time of retirement or death is borne by all partners, reducing their capital in their original profit-sharing ratio.

🎯 Exam Tip: Revaluation profits/losses are always distributed among all partners (existing and retiring/deceased) using their old profit-sharing ratio, as these adjustments relate to past periods.

 

Question 1. (7) If partnership deed is silent, interest is payable at __________ on unpaid amount payable to the retiring partner.
(A) 10% p.a.
(B) 12 % p.a.
(C) 6 % p.a.
(D) zero
Answer: (C) If the partnership deed does not specify the interest rate on the unpaid amount owed to a retiring partner, interest is payable at 6% per annum.
In simple words: By law, if the partnership agreement doesn't say otherwise, a retiring partner is entitled to 6% annual interest on any money the firm owes them.

🎯 Exam Tip: This is a statutory provision of the Indian Partnership Act, 1932, which applies when the partnership deed is silent on specific terms.

 

Question 1. (8) Accounting year ends on 31-3-2016. A partner dies on 30-6-2016. Deceased partners' share in profit is \( \frac {1}{3} \). Profit share payable to the partner is to be calculated on the basis of last year's profit Rs. 24,000 __________ amount will be paid as share in profit at the time of death.
(A) Rs. 8,000
(B) Rs. 24,000
(C) 1,333
(D) 2,000
Answer: (D) The deceased partner's share in profit will be Rs. 2,000. This is calculated by taking the last year's profit, Rs. 24,000, multiplying it by the partner's profit share \( \frac{1}{3} \), and then by the fraction of the year they were alive (\( \frac{3}{12} \) for April, May, June).
Calculation: \( Rs. 24,000 \times \frac{1}{3} \times \frac{3}{12} = Rs. 2,000 \)
In simple words: The deceased partner gets a share of the profit for the months they were alive, based on the previous year's earnings.

🎯 Exam Tip: Remember to calculate the profit for the period from the start of the accounting year until the date of death, applying the given profit-sharing ratio and basis (e.g., last year's profit or average profit).

 

Question 1. (9) Sweta, Geeta and Jyoti are equal partners. Gita retires. Gita's share is gained by Sweta and Jyoti equally. New profit and loss sharing ratio of Sweta and Jyoti will be
(A) 3:1
(B) 2:1
(C) 1:2
(D) 1:1
Answer: (D) The new profit and loss sharing ratio for Sweta and Jyoti will be 1:1. Initially, Sweta, Geeta, and Jyoti are equal partners with a ratio of 1:1:1, meaning each has a \( \frac{1}{3} \) share. When Gita retires, her \( \frac{1}{3} \) share is acquired equally by Sweta and Jyoti. This means Sweta gains \( \frac{1}{3} \times \frac{1}{2} = \frac{1}{6} \) and Jyoti gains \( \frac{1}{3} \times \frac{1}{2} = \frac{1}{6} \).
Sweta's new share = \( \frac{1}{3} \text{ (old)} + \frac{1}{6} \text{ (gain)} = \frac{2}{6} + \frac{1}{6} = \frac{3}{6} \)
Jyoti's new share = \( \frac{1}{3} \text{ (old)} + \frac{1}{6} \text{ (gain)} = \frac{2}{6} + \frac{1}{6} = \frac{3}{6} \)
Therefore, the new ratio for Sweta and Jyoti is \( \frac{3}{6} : \frac{3}{6} \), which simplifies to 1:1.
In simple words: Since Sweta and Jyoti equally take over Gita's share, and they were already equal partners, their new profit-sharing ratio remains equal.

🎯 Exam Tip: Always calculate the old shares, the gains of remaining partners, and then the new shares to determine the accurate new profit-loss sharing ratio. Equal acquisition implies splitting the retiring partner's share equally.

 

Question 1. (10) Workmen profit sharing fund is recorded as at the time of the retirement of a partner.
(A) a liability in new balance sheet.
(B) credited to all partners' capital account in their old profit-loss sharing ratio.
(C) debited to all partners' capital account in their old profit-loss sharing ratio.
(D) credited to the retiring partners' capital account.
Answer: (A) A workmen profit sharing fund is treated as a liability and is therefore presented as a liability in the new balance sheet when a partner retires.
In simple words: This fund is a specific liability to employees, not a distributable profit, so it stays on the liabilities side of the balance sheet.

🎯 Exam Tip: Differentiate between reserves that are distributable among partners (like General Reserve) and specific funds or provisions (like Workmen Profit Sharing Fund) that represent actual liabilities and are carried forward in the new balance sheet.

 

Question 2. Answer the Following Questions in One Sentence:

 

Question 2. (1) State the circumstances of the retirement of a partner.
Answer: A partner's retirement can occur under various circumstances, including:
• As outlined by the provisions of the Indian Partnership Act.
• Due to a partner's voluntary decision for personal reasons.
In simple words: A partner can retire either by legal agreement or simply by choosing to leave for personal reasons.

🎯 Exam Tip: Remember that the Indian Partnership Act, 1932, governs the general rules for partnership dissolution and retirement when the deed is silent or incomplete.

 

Question 2. (2) Which important accounting aspects are considered at the time of the retirement or death of a partner ?
Answer: At the time of a partner's retirement or death, several crucial accounting aspects are addressed:
• Calculating the new profit-loss sharing ratio and determining the gaining share of continuing partners.
• Valuing goodwill and applying its appropriate accounting treatment.
• Revaluing assets and liabilities of the firm.
• Distributing accumulated reserves and balances of undistributed profits and losses.
• Ascertaining the total amount payable to the retiring or deceased partner.
• Effecting the payment of the sum due to the retiring or deceased partner.
In simple words: When a partner leaves or dies, the firm must adjust profit shares, account for goodwill, revalue assets, distribute reserves, calculate what's owed to the departing partner, and then make that payment.

🎯 Exam Tip: These accounting adjustments ensure a fair and accurate settlement of accounts for the departing partner and proper restructuring of the continuing partnership.

 

Question 2. (3) Which balances are credited to all partners' capital accounts in their old profit-loss sharing ratio ?
Answer: Upon the retirement or death of a partner, undistributed profit balances and accumulated reserves displayed in the balance sheet are credited to the capital/current accounts of all partners, utilizing their old profit-sharing ratio.
In simple words: Any undistributed profits or reserves from the past are given to all partners (including the one leaving), increasing their capital based on their original profit shares.

🎯 Exam Tip: Credit balances (profits and reserves) increase partners' capital, while debit balances (losses and deferred revenue expenditure) decrease it.

 

Question 2. (4) Which balances are debited to all partners' capital accounts in their old profit-loss sharing ratio ?
Answer: At the time of a partner's retirement or demise, any balance of undistributed losses and deferred revenue expenditure shown in the balance sheet are debited to the capital/current accounts of all partners, according to their old profit-sharing ratio.
In simple words: Existing losses or expenses that haven't been written off yet are deducted from all partners' capital, in line with their original profit-sharing agreement, when someone leaves the firm.

🎯 Exam Tip: Ensure that all such debit balances are properly adjusted to avoid overstating the capital of continuing partners or the amount payable to the retiring partner.

 

Question 2. (5) Explain accounting treatment of old goodwill appearing in the balance sheet of the firm at the time of the retirement of a partner.
Answer: When a partner retires, any goodwill that already exists in the firm's balance sheet is distributed among all partners in their old profit-loss sharing ratio. This existing goodwill is written off, and the journal entry for this treatment is as follows:

Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
All partners' capital A/c	Dr.	(Amount)
To Goodwill A/c			(Amount)
(Being old goodwill written off among all partners in their old profit-loss sharing ratio.)

In simple words: If there's goodwill already on the books when a partner retires, it's considered an old asset and is removed by reducing the capital of all partners according to their original profit-sharing agreement.

🎯 Exam Tip: Existing goodwill is always written off using the old profit-sharing ratio for all partners (including the retiring one) before any new goodwill adjustments are made.

 

Question 2. (6) Explain accounting treatment of the new goodwill of the firm valued at the time of the retirement of a partner.
Answer: At the time of a partner's retirement or death, the newly valued goodwill of the firm is treated by crediting the retiring or deceased partner's share of goodwill to their capital account. This share is then debited to the capital accounts of the continuing partners in their gaining ratio. The journal entry for this is as follows:

Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
Continuing partners' capital/current A/c	Dr.	(Amount)
To Retiring/Deceased partners' capital A/c			(Amount)
(Being the retiring/deceased partner's share of goodwill debited to gaining partners in their gaining ratio.)

In simple words: When a partner leaves, their share of the firm's newly valued goodwill is paid for by the remaining partners who benefit from the exit, with the payment proportional to their increased profit shares.

🎯 Exam Tip: New goodwill is adjusted through the capital accounts of only the continuing partners who gain, and the retiring/deceased partner, using the gaining ratio.

 

Question 2. (7) When and why the profit and loss adjustment account (Revaluation Account) is prepared ?
Answer: The Profit and Loss Adjustment Account (Revaluation Account) is prepared at the time of a partner's retirement or death to record the accounting impacts of revaluing the firm's assets and liabilities.
In simple words: This account is created when a partner leaves to update the value of assets and liabilities to their current market price, ensuring that the departing partner receives their fair share based on accurate valuations.

🎯 Exam Tip: The Revaluation Account helps ascertain the true financial position of the firm at the time of retirement/death and distributes any revaluation profits or losses among all partners in their old ratio.

 

Question 2. (8) Who gives the share in goodwill to the retiring or deceased partner ? Why ?
Answer: The continuing partners provide the share of goodwill to the retiring or deceased partner. This is because, upon a partner's retirement or death, the continuing partners acquire a larger share of future profits, and therefore, they compensate the departing partner for their relinquished share of the firm's goodwill.
In simple words: The remaining partners pay the goodwill to the leaving partner because they will now receive a bigger slice of future profits.

🎯 Exam Tip: Goodwill is essentially compensation for the retiring partner's share in the firm's reputation and future earning capacity, which is now transferred to the continuing partners.

 

Question 3. Answer the Following Questions:

 

Question 3. (1) X, Y and Z are the partners sharing profit and loss in the ratio of 5 : 3 : 2, Z retires.
Answer: The existing profit and loss sharing ratio for partners X, Y, and Z is 5:3:2. When Partner Z retires, and no specific information regarding a new profit-sharing ratio is provided, the new ratio for the continuing partners X and Y will simply be their old ratio, which is 5:3. Consequently, their gaining ratio will also be the same as their old profit and loss ratio, i.e., 5:3.
In simple words: If Z leaves and no new profit-sharing plan is made, X and Y continue to share profits and gains in their original 5:3 proportion.

🎯 Exam Tip: In the absence of an explicit new profit-sharing agreement, the continuing partners assume the retiring partner's share in their old profit-sharing ratio, which then becomes their gaining ratio.

 

Question 3. (2) A, B and C are the partners sharing profit and loss in the ratio of \( \frac {1}{2},\frac {1}{3}, \) and \( \frac {1}{6} \) respectively. (A) If A retires (B) If B retires (C) If C retires.
Answer: First, convert the given profit and loss ratio of A, B, and C (\( \frac{1}{2} : \frac{1}{3} : \frac{1}{6} \)) to a common denominator, which is 6. This results in the old ratio being \( \frac{3}{6} : \frac{2}{6} : \frac{1}{6} \), or 3:2:1.

\( \implies \) Since no additional information about the new profit-loss ratio is provided, the old ratio of the continuing partners will also serve as their new profit-loss ratio and their gaining ratio.

(i) If A retires:
• New profit-loss ratio for partners B and C = 2:1
• New gaining ratio = 2:1

(ii) If B retires:
• New profit-loss ratio for partners A and C = 3:1
• New gaining ratio = 3:1

(iii) If C retires:
• New profit-loss ratio for partners A and B = 3:2
• New gaining ratio = 3:2
In simple words: When one partner leaves, and no new agreement is formed, the remaining partners simply continue to share profits and gains in their original proportions relative to each other.

🎯 Exam Tip: Always normalize fractional ratios to whole numbers with a common denominator first to simplify calculations and comparisons.

 

Question 3. (3) P, Q and R are the partners sharing profit and loss in the ratio of 40%, 20% and 40% respectively. Q retires. P is acquiring \( \frac {3}{20} \) and R is acquiring \( \frac {1}{20} \) from Q's share.
Answer: The initial profit and loss sharing ratio for P, Q, and R is 40%:20%:40%, which simplifies to 4:2:4, or 2:1:2. This means their shares are \( \frac{2}{5} : \frac{1}{5} : \frac{2}{5} \).
Partner Q retires, whose share is \( \frac{1}{5} \). P acquires \( \frac{3}{20} \) share and R acquires \( \frac{1}{20} \) share from Q's share.

\( \implies \) Gain of P = \( \frac{3}{20} \)
Gain of R = \( \frac{1}{20} \)
The gaining ratio for P and R is \( \frac{3}{20} : \frac{1}{20} \), which simplifies to 3:1.

New share = Old share + Gain
P's new share = \( \frac{2}{5} + \frac{3}{20} = \frac{8+3}{20} = \frac{11}{20} \)
R's new share = \( \frac{2}{5} + \frac{1}{20} = \frac{8+1}{20} = \frac{9}{20} \)

\( \implies \) The new profit and loss sharing ratio for P and R is 11:9.
In simple words: After Q retires, P and R gain specific portions of Q's share, so their new individual shares are calculated by adding these gains to their original shares, resulting in a new 11:9 ratio.

🎯 Exam Tip: When specific acquisition shares are given, directly add them to the continuing partners' old shares to find the new ratio, and their individual gains determine the gaining ratio.

 

Question 3. (4) M, N and O are the partners sharing profit and loss in the ratio of 3 : 2 : 1. M retires, N is acquiring \( \frac {1}{10} \) from M's share and balance is acquired by O.
Answer: The old profit-loss ratio for partners M, N, and O is 3:2:1. Partner M retires, whose share is \( \frac{3}{6} \).
N receives \( \frac{1}{10} \) from M's share.

\( \implies \) O's gain = M's share - N's gain
O's gain = \( \frac{3}{6} - \frac{1}{10} = \frac{15-3}{30} = \frac{12}{30} \)
N's gain is \( \frac{1}{10} \), which is equivalent to \( \frac{3}{30} \). O's gain is \( \frac{12}{30} \).

\( \implies \) The gaining ratio for N and O is \( \frac{3}{30} : \frac{12}{30} \), which simplifies to 3:12 or 1:4.

New share = Old share + Gain
N's new share = \( \frac{2}{6} + \frac{1}{10} = \frac{10+3}{30} = \frac{13}{30} \)
O's new share = \( \frac{1}{6} + \frac{12}{30} = \frac{5+12}{30} = \frac{17}{30} \)

\( \implies \) The new profit and loss sharing ratio for N and O is 13:17.
In simple words: M retires, N takes a part of M's share, and O takes the rest. We then calculate each continuing partner's new share by adding their gain to their original share.

🎯 Exam Tip: When a portion of the retiring partner's share is acquired by specific partners, ensure the total share acquired equals the retiring partner's total share. Always convert fractions to a common denominator for accurate calculation.

 

Question 3. (5) C, B and D are the partners sharing profit and loss in the ratio of 4 : 5 : 3. D retires and his share is taken up by C and B in the ratio of 2 : 1.
Answer: The initial profit-loss ratio for C, B, and D is 4:5:3. This means their shares are \( \frac{4}{12} : \frac{5}{12} : \frac{3}{12} \). Partner D retires, and his share (\( \frac{3}{12} \)) is acquired by C and B in the ratio of 2:1.

\( \implies \) Gaining share of continuing partner = Share of the retiring partner \( \times \) Gaining share ratio
C's gain = \( \frac{3}{12} \times \frac{2}{3} = \frac{6}{36} \)
B's gain = \( \frac{3}{12} \times \frac{1}{3} = \frac{3}{36} \)

\( \implies \) The gaining ratio for C and B is \( \frac{6}{36} : \frac{3}{36} \), which simplifies to 6:3 or 2:1.

New share = Old share + Gain
C's new share = \( \frac{4}{12} + \frac{6}{36} = \frac{12+6}{36} = \frac{18}{36} = \frac{1}{2} \)
B's new share = \( \frac{5}{12} + \frac{3}{36} = \frac{15+3}{36} = \frac{18}{36} = \frac{1}{2} \)

\( \implies \) The new profit-loss sharing ratio for partners C and B is 1:1.
In simple words: When D retires, C and B divide D's share in a 2:1 ratio. Their new profit shares are found by adding their respective gains to their original shares, resulting in an equal 1:1 ratio.

🎯 Exam Tip: Pay close attention to the wording; "taken up by C and B in the ratio" means the retiring partner's share is divided in that ratio to determine each continuing partner's gain.

 

Question 3. (6) A, M and C are the partners sharing profit and loss in the ratio of 3 : 5 : 2. M retires and his share is taken up by C only.
Answer: The profit-loss sharing ratio for partners A, M, and C is 3:5:2. This means their shares are \( \frac{3}{10} : \frac{5}{10} : \frac{2}{10} \). Partner M retires, and his entire \( \frac{5}{10} \) share is taken up solely by C.

\( \implies \) C's gain = \( \frac{5}{10} \)
A's gain = 0 (since A acquires none of M's share)

New share = Old share + Gain
A's new share = \( \frac{3}{10} + 0 = \frac{3}{10} \)
C's new share = \( \frac{2}{10} + \frac{5}{10} = \frac{2+5}{10} = \frac{7}{10} \)

\( \implies \) The new profit-loss sharing ratio for A and C is 3:7.
In simple words: When M retires and C takes M's entire share, A's share remains the same while C's share increases significantly, leading to a new 3:7 ratio between A and C.

🎯 Exam Tip: When one continuing partner acquires the entire share of a retiring partner, only that partner's share changes; others remain constant unless specified.

 

Question 3. (7) P, Q, R and S are the partners sharing profit and loss in the ratio of 4 : 3 : 2 : 1. Q retires and his share of profit is gained equally by R and S.
Answer: The old profit and loss sharing ratio for P, Q, R, and S is 4:3:2:1, which sums to 10. Q retires, and Q's share (\( \frac{3}{10} \)) is acquired equally by R and S, meaning in a 1:1 ratio.

Now, calculate the gain for each continuing partner:
Gain = Share of retiring partner \( \times \) Gaining share ratio
R's gain = \( \frac{3}{10} \times \frac{1}{2} = \frac{3}{20} \)
S's gain = \( \frac{3}{10} \times \frac{1}{2} = \frac{3}{20} \)

Now, calculate the new share for each continuing partner:
New share = Old share + Gain
P's new share = \( \frac{4}{10} + 0 = \frac{4}{10} \)
R's new share = \( \frac{2}{10} + \frac{3}{20} = \frac{4+3}{20} = \frac{7}{20} \)
S's new share = \( \frac{1}{10} + \frac{3}{20} = \frac{2+3}{20} = \frac{5}{20} \)

\( \implies \) The new profit-loss sharing ratio for P, R, and S is \( \frac{4}{10} : \frac{7}{20} : \frac{5}{20} \). To simplify, convert \( \frac{4}{10} \) to \( \frac{8}{20} \). So the ratio is 8:7:5.
In simple words: When Q retires, P's share remains the same. R and S equally divide Q's share, so their individual shares increase, leading to a new profit-sharing ratio of 8:7:5 among P, R, and S.

🎯 Exam Tip: Always verify that the sum of gains equals the retiring partner's share and that the new shares are calculated consistently with the chosen common denominator.

 

Question 3. (8) M, N, O and P are the partners sharing profit and loss in the ratio of 5 : 3 : 2 : 2. N and P retired. N's share is acquired by O and P's share is acquired by M.
Answer: The initial profit-loss sharing ratio for M, N, O, and P is 5:3:2:2, which sums to 12. Their shares are \( \frac{5}{12} : \frac{3}{12} : \frac{2}{12} : \frac{2}{12} \). Partners N and P retire.
N's share (\( \frac{3}{12} \)) is acquired by O.
P's share (\( \frac{2}{12} \)) is acquired by M.

\( \implies \) Gain of M = \( \frac{2}{12} \) (from P's share)
Gain of O = \( \frac{3}{12} \) (from N's share)

\( \implies \) The gaining ratio for M and O is \( \frac{2}{12} : \frac{3}{12} \), which simplifies to 2:3.

New share = Old share + Gain
New share of M = \( \frac{5}{12} + \frac{2}{12} = \frac{7}{12} \)
New share of O = \( \frac{2}{12} + \frac{3}{12} = \frac{5}{12} \)

\( \implies \) The new profit-loss sharing ratio for M and O is 7:5.
In simple words: When N and P retire, M takes P's share, and O takes N's share. Their individual shares increase, leading to a new profit-sharing ratio of 7:5 between M and O.

🎯 Exam Tip: When multiple partners retire, calculate each continuing partner's gain from specific retiring partners' shares separately before adding to their old shares.

 

Question 3. (9) A, B and C are the partners sharing profit and loss in the ratio of \( \frac {1}{2} \), 30% and \( \frac {1}{5} \) respectively. B's share is taken over by A and C in the ratio of 3 : 2.
Answer: First, convert the given profit and loss ratio of A, B, and C to a common base:
A's share = \( \frac{1}{2} \)
B's share = 30% = \( \frac{30}{100} = \frac{3}{10} \)
C's share = \( \frac{1}{5} \)
To find a common denominator (10), the old ratio is \( \frac{5}{10} : \frac{3}{10} : \frac{2}{10} \), or 5:3:2.

Partner B retires, and B's share (\( \frac{3}{10} \)) is acquired by A and C in the ratio of 3:2.

\( \implies \) Gaining ratio for A and C = 3:2.
Gain = Share of retiring partner \( \times \) Gaining share ratio
A's gain = \( \frac{3}{10} \times \frac{3}{5} = \frac{9}{50} \)
C's gain = \( \frac{3}{10} \times \frac{2}{5} = \frac{6}{50} \)

New share = Old share + Gain
A's new share = \( \frac{5}{10} + \frac{9}{50} = \frac{25+9}{50} = \frac{34}{50} \)
C's new share = \( \frac{2}{10} + \frac{6}{50} = \frac{10+6}{50} = \frac{16}{50} \)

\( \implies \) The new profit-loss sharing ratio for A and C is \( \frac{34}{50} : \frac{16}{50} \), which simplifies to 17:8.
In simple words: After B retires, A and C divide B's share in a 3:2 ratio. Their new shares are found by adding their respective gains to their original shares, resulting in a new 17:8 ratio.

🎯 Exam Tip: Always convert all given ratios (fractions, percentages) to a common denominator to establish the original ratio clearly before proceeding with retirement calculations.

 

Question 3. (10) A, B and C are the partners sharing profit and loss in the ratio of 5 : 3 : 2. B and C sharing profit in the ratio of 40% and 60% after the retirement of A.
Answer: The old profit and loss sharing ratio for A, B, and C is 5:3:2. Partner A retires. After A's retirement, B and C agree to share profits in the ratio of 40%:60%, which simplifies to 2:3. This is their new ratio.

Now, calculate the gain for each continuing partner:
Gain = New share - Old share
B's gain = \( \frac{2}{5} - \frac{3}{10} = \frac{4-3}{10} = \frac{1}{10} \)
C's gain = \( \frac{3}{5} - \frac{2}{10} = \frac{6-2}{10} = \frac{4}{10} \)

\( \implies \) The gaining ratio for partners B and C is \( \frac{1}{10} : \frac{4}{10} \), which simplifies to 1:4.
The new profit-loss ratio for B and C is 2:3.
In simple words: A retires, and B and C decide on a new 2:3 profit share. To find their gains, we subtract their old shares from their new shares, showing their gaining ratio as 1:4.

🎯 Exam Tip: When both old and new ratios are provided, the gaining ratio is directly computed by subtracting the old share from the new share of continuing partners.

 

Question 3. (11) A, B and C are the partners sharing profit and loss in the ratio of 3 : 2 : 1. C retires. The new profit and loss sharing ratio of A and B is decided at 7 : 5.
Answer: The old profit and loss sharing ratio for A, B, and C is 3:2:1. Partner C retires. The new profit and loss sharing ratio for A and B is decided to be 7:5.

Now, calculate the gain for each continuing partner:
Gain = New share - Old share
A's old share = \( \frac{3}{6} \), new share = \( \frac{7}{12} \)
A's gain = \( \frac{7}{12} - \frac{3}{6} = \frac{7-6}{12} = \frac{1}{12} \)
B's old share = \( \frac{2}{6} \), new share = \( \frac{5}{12} \)
B's gain = \( \frac{5}{12} - \frac{2}{6} = \frac{5-4}{12} = \frac{1}{12} \)

\( \implies \) The gaining ratio for A and B is \( \frac{1}{12} : \frac{1}{12} \), which simplifies to 1:1.
The new profit-loss sharing ratio for A and B is 7:5.
In simple words: C retires, and A and B's new profit-sharing is set at 7:5. By comparing their old shares to their new ones, we find they both gain an equal portion of C's share.

🎯 Exam Tip: Always ensure that the sum of the old shares and the sum of the new shares (for continuing partners) add up to their respective total proportions.

 

Question 3. (12) A, B and C are the partners sharing profit in the ratio of 4 : 5 : 1. Following journal entry for goodwill is passed at the time of the retirement of B.
A's capital A/c Dr 6,000
C's capital A/c Dr 4,000
To B's capital A/c 10,000
Answer: The partners A, B, and C share profits in the ratio of 4:5:1. Partner B retires. From the provided journal entry, we observe that B's Capital Account is credited with Rs. 10,000, which represents B's share of goodwill. A's Capital Account is debited with Rs. 6,000 and C's Capital Account is debited with Rs. 4,000.

This implies that A and C are the gaining partners who are compensating B for B's share of goodwill. The gaining ratio of A and C is derived from their debit amounts: Rs. 6,000 : Rs. 4,000, which simplifies to 3:2. Since no other information is provided for the new profit-loss ratio, the old ratio of continuing partners (A and C) among themselves would be 4:1.

Let's assume the goodwill of the firm is not given, but B's share is Rs. 10,000. To confirm the gaining ratio from the given capital amounts, we see that A and C share B's portion of goodwill in a 3:2 ratio (6,000:4,000).

New share = Old share + Gain (assuming new ratio is not explicitly given and old ratio of A:C among themselves is 4:1 for now, but the question gives the gaining ratio implicitly through the journal entry).

\( \implies \) The gaining ratio of A and C is 3:2.
A's old share = \( \frac{4}{10} \)
C's old share = \( \frac{1}{10} \)
B's share (retiring) = \( \frac{5}{10} \)

A's gain = \( \frac{5}{10} \times \frac{3}{5} = \frac{15}{50} \)
C's gain = \( \frac{5}{10} \times \frac{2}{5} = \frac{10}{50} \)

A's new share = \( \frac{4}{10} + \frac{15}{50} = \frac{20+15}{50} = \frac{35}{50} \)
C's new share = \( \frac{1}{10} + \frac{10}{50} = \frac{5+10}{50} = \frac{15}{50} \)

\( \implies \) The new profit-loss sharing ratio for A and C is \( \frac{35}{50} : \frac{15}{50} \), which simplifies to 7:3.
In simple words: The journal entry shows A and C compensating B for goodwill, with their contributions implying a 3:2 gaining ratio. This allows us to calculate their new profit shares, which come out to be 7:3.

🎯 Exam Tip: When a journal entry for goodwill is provided within the question, use the debited and credited amounts to infer the gaining ratio and the retiring partner's share of goodwill.

 

Question 3. (13) A, B, C and D are the partners sharing profit and loss in the ratio of 4 : 3 : 2 : 1. C retires. After the retirement of C, A will maintain his old profit share.
Answer: The partners A, B, C, and D share profits and losses in the ratio of 4:3:2:1 (total 10 parts). Partner C retires, whose share is \( \frac{2}{10} \). A decides to maintain his old profit share of \( \frac{4}{10} \). This means A does not gain any share from C. Therefore, the entire share of the retiring partner C (\( \frac{2}{10} \)) will be gained by the remaining partners B and D, in their existing ratio of 3:1 (derived from their old ratio of 3:1).

Now, calculate the gain for B and D:
Gain = Share of retiring partner \( \times \) Gaining share ratio
B's gain = \( \frac{2}{10} \times \frac{3}{4} = \frac{6}{40} \)
D's gain = \( \frac{2}{10} \times \frac{1}{4} = \frac{2}{40} \)

New share = Old share + Gain
A's new share = \( \frac{4}{10} + 0 = \frac{4}{10} = \frac{16}{40} \)
B's new share = \( \frac{3}{10} + \frac{6}{40} = \frac{12+6}{40} = \frac{18}{40} \)
D's new share = \( \frac{1}{10} + \frac{2}{40} = \frac{4+2}{40} = \frac{6}{40} \)

\( \implies \) The new profit-loss sharing ratio for partners A, B, and D is \( \frac{16}{40} : \frac{18}{40} : \frac{6}{40} \), which simplifies to 16:18:6 or 8:9:3.
In simple words: When C retires and A keeps his original share, B and D split C's share according to their existing ratio. This leads to a new profit-sharing ratio of 8:9:3 among A, B, and D.

🎯 Exam Tip: Pay attention to special conditions, such as a partner maintaining their old share, as this impacts how the retiring partner's share is distributed among others.

 

Question 4. Give Necessary Entry of Goodwill for the Following:

 

Question 4. (1) Akruti, Prakruti and Sanskruti are the partners sharing profit and loss in the ratio of 5 : 3: 2. Sanskruti retires. At the time of her retirement the goodwill is valued at Rs. 30,000.
Answer: The partners Akruti, Prakruti, and Sanskruti share profits in the ratio of 5:3:2. Sanskruti retires. The firm's goodwill is valued at Rs. 30,000. Sanskruti's share of goodwill is \( \frac{2}{10} \times Rs. 30,000 = Rs. 6,000 \). In the absence of a new ratio, Akruti and Prakruti will gain in their old ratio of 5:3.
Akruti's share of goodwill debit = \( \frac{5}{8} \times Rs. 6,000 = Rs. 3,750 \)
Prakruti's share of goodwill debit = \( \frac{3}{8} \times Rs. 6,000 = Rs. 2,250 \)
The journal entry for distributing Sanskruti's share of goodwill among the gaining partners (Akruti and Prakruti) is as follows:

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
(1)	Akruti's Capital A/c	Dr.	3,750
	Prakruti's Capital A/c	Dr.	2,250
	To Sanskruti's Capital A/c			6,000
	(Being Sanskruti's share of new goodwill debited to gaining partners in their gaining ratio.)

In simple words: Sanskruti's share of the firm's goodwill is calculated and then paid by Akruti and Prakruti, who will benefit from her retirement, in proportion to their increased profit shares.

🎯 Exam Tip: Always calculate the retiring partner's share of the total firm's goodwill first, then distribute it to the gaining partners in their gaining ratio.

 

Question 4. (2) X, Y and Z are the partners sharing profit and loss in equal proportions. Goodwill appears at Rs. 42,000 in the books of the firm. At the time of retirement of X, the goodwill of the firm is valued at Rs. 1,20,000.
Answer: Partners X, Y, and Z share profits and losses equally (1:1:1). At the time of X's retirement, there is existing goodwill of Rs. 42,000 in the books, and the firm's goodwill is valued at Rs. 1,20,000. X's share of existing goodwill is \( \frac{1}{3} \times Rs. 42,000 = Rs. 14,000 \). X's share of new goodwill is \( \frac{1}{3} \times Rs. 1,20,000 = Rs. 40,000 \).

First, the existing goodwill is written off among all partners in their old profit-loss sharing ratio:

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
(1)	X's Capital A/c	Dr.	14,000
	Y's Capital A/c	Dr.	14,000
	Z's Capital A/c	Dr.	14,000
	To Goodwill A/c			42,000
	(Being old goodwill written off among all partners in their old profit-loss sharing ratio.)

Next, X's share of new goodwill (Rs. 40,000) is adjusted through the capital accounts of the continuing partners Y and Z. Since they are continuing equally, their gaining ratio is 1:1. Each will bear Rs. 20,000.

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
(2)	Y's Capital A/c	Dr.	20,000
	Z's Capital A/c	Dr.	20,000
	To X's Capital A/c			40,000
	(Being X's share of goodwill debited to Y and Z in their gaining ratio.)

Notes:
(1) Given that new profit-loss ratio or gaining ratio is not provided, the old ratio of Y and Z (1:1) will be adopted as their new profit-loss ratio and gaining ratio.
(2) X's share of goodwill is Rs. 1,20,000 \( \times \frac{1}{3} = \) Rs. 40,000, which will be contributed by Y and Z in a 1:1 gaining ratio.
(3) The amount of old goodwill shown in the balance sheet is written off among all partners in their old ratio (1:1:1).
In simple words: First, the existing goodwill is removed from the books by reducing all partners' capital. Then, X's share of the firm's newly valued goodwill is calculated and paid for by Y and Z, who continue as equal partners.

🎯 Exam Tip: Always address the write-off of existing goodwill before making any adjustments for the newly valued goodwill at retirement.

 

Question 4. (3) L, M, N and O are the partners sharing profit and loss in the ratio of 5 : 4:3 :3. L retires on 1-4-2017. At the time of retirement of L, goodwill appears at Rs. 75,000 in the books of old firm. The new profit and loss sharing ratio of M, N and O is decided at 3 : 1: 1. On L's retirement, the goodwill of the firm is valued at Rs. 90,000.
Answer: The old profit and loss sharing ratio for L, M, N, and O is 5:4:3:3 (total 15 parts). L retires. The new profit and loss sharing ratio for M, N, and O is 3:1:1 (total 5 parts).

First, the existing goodwill of Rs. 75,000 is written off among all partners in their old profit-loss sharing ratio:

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
(1)	L's Capital A/c	Dr.	25,000
	M's Capital A/c	Dr.	20,000
	N's Capital A/c	Dr.	15,000
	O's Capital A/c	Dr.	15,000
	To Goodwill A/c			75,000
	(Being old goodwill written off among all partners in their old profit-loss sharing ratio.)

Next, calculate the gaining ratio for continuing partners M, N, and O:
Old shares: M=\( \frac{4}{15} \), N=\( \frac{3}{15} \), O=\( \frac{3}{15} \)
New shares: M=\( \frac{3}{5} \), N=\( \frac{1}{5} \), O=\( \frac{1}{5} \)
Gain = New share - Old share
M's gain = \( \frac{3}{5} - \frac{4}{15} = \frac{9-4}{15} = \frac{5}{15} \)
N's gain = \( \frac{1}{5} - \frac{3}{15} = \frac{3-3}{15} = 0 \)
O's gain = \( \frac{1}{5} - \frac{3}{15} = \frac{3-3}{15} = 0 \)
\( \implies \) Only M gains. Therefore, L's share of goodwill will be entirely borne by M.

L's share of firm's valued goodwill (Rs. 90,000) = \( \frac{5}{15} \times Rs. 90,000 = Rs. 30,000 \).
This Rs. 30,000 will be debited to M's Capital Account and credited to L's Capital Account.

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
(2)	M's Capital A/c	Dr.	30,000
	To L's Capital A/c			30,000
	(Being L's share of goodwill paid by M as per M's gain.)

Notes:
(1) Gaining Ratio calculation shows only M gained from L's retirement.
(2) L's goodwill share is Rs. 90,000 \( \times \frac{5}{15} = \) Rs. 30,000.
(3) The old goodwill amount of Rs. 75,000 is written off among all partners in their old ratio (5:4:3:3).
In simple words: First, existing goodwill is removed from everyone's capital. Then, since only M gains from L's retirement, M alone pays L's share of the new goodwill.

🎯 Exam Tip: When calculating gains, ensure the denominator for old and new shares is consistent to avoid errors. If only one partner gains, they bear the entire goodwill of the retiring partner.

 

Question 4. (4) A, B and C are the partners of a firm. B retires. At the time of B's retirement, the goodwill of the firm is valued at Rs. 60,000. The new profit-loss sharing ratio of A and C decided at 7 : 2.
Answer: The old profit and loss sharing ratio for A, B, and C is 1:1:1 (total 3 parts). B retires. The new profit and loss sharing ratio for A and C is 7:2 (total 9 parts). The firm's goodwill is valued at Rs. 60,000.

Calculate the gaining ratio for A and C:
Old shares: A=\( \frac{1}{3} \), C=\( \frac{1}{3} \)
New shares: A=\( \frac{7}{9} \), C=\( \frac{2}{9} \)
Gain = New share - Old share
A's gain = \( \frac{7}{9} - \frac{1}{3} = \frac{7-3}{9} = \frac{4}{9} \)
C's gain = \( \frac{2}{9} - \frac{1}{3} = \frac{2-3}{9} = \frac{-1}{9} \) (This indicates C is sacrificing, not gaining).

B's share of firm's valued goodwill = \( \frac{1}{3} \times Rs. 60,000 = Rs. 20,000 \) (Credit to B's Capital A/c).
A's share (gaining) = \( \frac{4}{9} \times Rs. 60,000 = Rs. 26,667 \) (Debit to A's Capital A/c).
C's share (sacrificing) = \( \frac{1}{9} \times Rs. 60,000 = Rs. 6,667 \) (Credit to C's Capital A/c).
The journal entry for goodwill adjustment will involve A compensating B and C for their shares:

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
(1)	A's Capital A/c	Dr.	26,667
	To B's Capital A/c			20,000
	To C's Capital A/c			6,667
	(Being B's share of goodwill and C's share of goodwill debited to A's capital A/c as A is the only gaining partner, while C is sacrificing.)

Notes:
(1) Gaining Ratio:
• Gain of A = \( \frac{7}{9} - \frac{1}{3} = \frac{7-3}{9} = \frac{4}{9} \)
• Gain of C = \( \frac{2}{9} - \frac{1}{3} = \frac{2-3}{9} = \frac{-1}{9} \) (C is sacrificing).
(2) B's goodwill receivable is Rs. 20,000. C is also sacrificing and should receive goodwill. A is the sole gaining partner.
In simple words: When B retires, A gains from the change, but C actually loses a bit of profit share. So, A pays goodwill not only to B but also to C, reflecting C's sacrifice.

🎯 Exam Tip: Always calculate the exact gain or sacrifice for each continuing partner. A negative gain indicates a sacrifice, meaning that partner should also be credited for goodwill.

 

Question 4. (5) B, R, T and S are the partners sharing profit and loss in the ratio of 4 : 3 : 1 : 2. B retires. Goodwill is appearing in their books at Rs. 20,000 and at the time of B's retirement, goodwill is valued at Rs. 60,000. R, T and S decided to share the future profits of new firm in the ratio of 1:2:2.
Answer: The old profit and loss sharing ratio for B, R, T, and S is 4:3:1:2 (total 10 parts). B retires. The new profit and loss sharing ratio for R, T, and S is 1:2:2 (total 5 parts). Goodwill existing in the books is Rs. 20,000, and the firm's goodwill is valued at Rs. 60,000.

First, the existing goodwill of Rs. 20,000 is written off among all partners in their old profit-loss sharing ratio:
B's share = \( \frac{4}{10} \times Rs. 20,000 = Rs. 8,000 \)
R's share = \( \frac{3}{10} \times Rs. 20,000 = Rs. 6,000 \)
T's share = \( \frac{1}{10} \times Rs. 20,000 = Rs. 2,000 \)
S's share = \( \frac{2}{10} \times Rs. 20,000 = Rs. 4,000 \)

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
(1)	B's Capital A/c	Dr.	8,000
	R's Capital A/c	Dr.	6,000
	T's Capital A/c	Dr.	2,000
	S's Capital A/c	Dr.	4,000
	To Goodwill A/c			20,000
	(Being old goodwill written off among all partners in their old profit-loss ratio.)

Next, calculate the gaining/sacrificing ratio for R, T, and S for new goodwill:
Old shares: R=\( \frac{3}{10} \), T=\( \frac{1}{10} \), S=\( \frac{2}{10} \)
New shares: R=\( \frac{1}{5} \), T=\( \frac{2}{5} \), S=\( \frac{2}{5} \)
Gain = New share - Old share
R's gain = \( \frac{1}{5} - \frac{3}{10} = \frac{2-3}{10} = \frac{-1}{10} \) (Sacrifice)
T's gain = \( \frac{2}{5} - \frac{1}{10} = \frac{4-1}{10} = \frac{3}{10} \)
S's gain = \( \frac{2}{5} - \frac{2}{10} = \frac{4-2}{10} = \frac{2}{10} \)

B's share of firm's valued goodwill = \( \frac{4}{10} \times Rs. 60,000 = Rs. 24,000 \) (Credit to B's Capital A/c).
R's share (sacrificing) = \( \frac{1}{10} \times Rs. 60,000 = Rs. 6,000 \) (Credit to R's Capital A/c).
T's share (gaining) = \( \frac{3}{10} \times Rs. 60,000 = Rs. 18,000 \) (Debit to T's Capital A/c).
S's share (gaining) = \( \frac{2}{10} \times Rs. 60,000 = Rs. 12,000 \) (Debit to S's Capital A/c).
The gaining ratio for T and S is 3:2.

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
(2)	T's Capital A/c	Dr.	18,000
	S's Capital A/c	Dr.	12,000
	To B's Capital A/c			24,000
	To R's Capital A/c			6,000
	(Being B's and R's share of goodwill debited to T's and S's capital accounts in their gaining ratio.)

Notes:
(1) Gaining Ratio calculation based on old and new shares shows R is sacrificing, while T and S are gaining.
(2) Amount of goodwill received by retiring partner B = Rs. 60,000 \( \times \frac{4}{10} = \) Rs. 24,000.
Since R sacrifices his share, the amount of goodwill received by R = Rs. 60,000 \( \times \frac{1}{10} = \) Rs. 6,000.
Total amount of goodwill to be credited = Rs. 24,000 + Rs. 6,000 = Rs. 30,000.
This amount will be debited to Capital Accounts of T and S in their gaining ratio (3:2).
In simple words: First, existing goodwill is eliminated. Then, B's share of new goodwill, plus R's sacrificing share, is paid for by T and S, who are increasing their profit shares.

🎯 Exam Tip: When calculating gains/sacrifices, ensure all partners' old and new shares are on a common denominator. The total debit for goodwill adjustments must always equal the total credit.

 

Question 4. (6) A, M, U and L are the partners sharing profit and loss in the ratio of 6 : 4:3:2. U retires. His capital account after making adjustments for reserves and profit on revaluation is Rs. 80,000. Remaining partners have agreed to pay him Rs. 1,40,000 in full settlement of his claim. The new profit-loss sharing ratio of A, M and L is decided at 6 : 5: 4 after the retirement of U.
Answer: The old profit and loss sharing ratio for A, M, U, and L is 6:4:3:2 (total 15 parts). U retires. The new profit-loss sharing ratio for A, M, and L is 6:5:4 (total 15 parts).

U's capital account balance after all adjustments (excluding goodwill adjustment) is Rs. 80,000. However, U is paid Rs. 1,40,000 in full settlement. The difference represents U's hidden share of goodwill: Rs. 1,40,000 - Rs. 80,000 = Rs. 60,000.

This goodwill of Rs. 60,000 is to be borne by the gaining partners. Let's calculate the gaining ratio for A, M, and L:
Old shares: A=\( \frac{6}{15} \), M=\( \frac{4}{15} \), L=\( \frac{2}{15} \)
New shares: A=\( \frac{6}{15} \), M=\( \frac{5}{15} \), L=\( \frac{4}{15} \)
Gain = New share - Old share
A's gain = \( \frac{6}{15} - \frac{6}{15} = 0 \)
M's gain = \( \frac{5}{15} - \frac{4}{15} = \frac{1}{15} \)
L's gain = \( \frac{4}{15} - \frac{2}{15} = \frac{2}{15} \)

The gaining ratio for M and L is \( \frac{1}{15} : \frac{2}{15} \), which simplifies to 1:2. A does not gain.

M's share of goodwill debit = \( \frac{1}{3} \times Rs. 60,000 = Rs. 20,000 \)
L's share of goodwill debit = \( \frac{2}{3} \times Rs. 60,000 = Rs. 40,000 \)
The journal entry to adjust this hidden goodwill is:

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
(1)	M's Capital A/c	Dr.	20,000
	L's Capital A/c	Dr.	40,000
	To U's Capital A/c			60,000
	(Being amount of goodwill of U's share given to M and L in their gaining ratio.)

Notes:
(1) Gaining Ratio calculation confirms M and L gain in a 1:2 ratio, while A has no gain.
(2) Amount of Goodwill:
U's agreed payout for retirement = Rs. 1,40,000
U's capital (excluding goodwill adjustment) = Rs. 80,000
Hidden goodwill paid by U = Rs. 60,000
This amount is debited to the capital accounts of M and L in their gaining ratio (1:2).
In simple words: U is paid more than his adjusted capital, with the excess being his share of hidden goodwill. This goodwill is paid by M and L, who gain profit shares, in their 1:2 gaining ratio.

🎯 Exam Tip: When the actual payment to a retiring partner exceeds their adjusted capital balance, the difference is considered their share of "hidden goodwill" and must be accounted for accordingly.

 

Question 6. Rohit, Mohit and Virat are partners sharing profit and loss in the ratio of 4 : 3 : 2. Balance sheet of the firm as on 31-3-2017 was as under :

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Goodwill	36,000
Rohit	1,60,000	Land-building	1,50,000
Mohit	96,000	Machinery	90,000
Virat	80,000	3,36,000	Stock	85,000
Reserve fund	45,000	Debtors	60,000
Workmen compensation reserve	13,500	Bad debt reserve	4,000	56,000
Partners' loan :		Bank	63,000
Rohit	10,000	Advertisement campaign
Mohit	16,000	26,000	expenditure	4,500
Creditors	64,000
	4,84,500		4,84,500

Rohit retired on 1-4-2017. Terms of retirement is as under:
(1) Value of land-building is Rs. 1,80,000.
(2) Value of machinery is to be reduced by Rs. 15,000.
(3) Provision for doubtful debts is to be kept at 10% on debtors.
(4) Rs. 5,000 not payable to creditors.
(5) Valuation of goodwill is Rs. 1,80,000.
(6) New profit-loss sharing ratio of Mohit and Virat is 2 : 1.
(7) Rs. 20,000 are to be paid to Rohit and balance will be kept as loan. Prepare Revaluation account, Partners' capital accounts and Balance sheet after retirement.

Answer:

The Revaluation Account, Partners' Capital Accounts, and Balance Sheet after Rohit's retirement are prepared as follows:

Dr. Revaluation Account Cr.

Particulars	Amt. (Rs.)	Particulars	Amt. (Rs.)
To Machinery A/c	15,000	By Land-building A/c	30,000
To Bad debts reserve A/c	2,000	By Creditors A/c	5,000
Profit : To Partners capital A/c
Rohit	8,000
Mohit	6,000
Virat	4,000	18,000
	35,000		35,000

Dr. Partners' Capital Accounts Cr.

Particulars	Rohit (Rs.)	Mohit (Rs.)	Virat (Rs.)	Particulars	Rohit (Rs.)	Mohit (Rs.)	Virat (Rs.)
To Goodwill A/c	16,000	12,000	8,000	By Balance b/d	1,60,000	96,000	80,000
To Adv. Campaign Exp. A/c	-	-	1,000	By Revaluation A/c	8,000	6,000	4,000
To Rohit's capital A/c (New Goodwill)	60,000			By Reserve Fund A/c	20,000	15,000	10,000
To Cash A/c	20,000			By Workmen compensation reserve A/c	6,000	4,500	3,000
To Loan A/c	2,46,000			By Mohit's capital A/c (New Goodwill)	60,000
To Balance c/d		48,000	68,000	By Virat's capital A/c (New Goodwill)	20,000
				By Rohit loan A/c	10,000
	2,84,000	1,21,500	97,000		2,84,000	1,21,500	97,000

Dr. Bank Account Cr.

Particulars	Amt. (Rs.)	Particulars	Amt. (Rs.)
To Balance b/d	63,000	By Rohit's capital A/c	20,000
		By Balance c/d	43,000
	63,000		63,000

Balance sheet as on 1-4-2017 after retirement

Capital-Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Land-Building	1,80,000
Mohit	48,000	Machinery	75,000
Virat	68,000	1,16,000	Stock	85,000
Creditors	59,000	Debtors	60,000
Mohit's Loan A/c	16,000	- B.D.R.	6,000	54,000
Rohit's Loan A/c	2,46,000	Bank Balance	43,000
	4,37,000		4,37,000

In simple words: This solution demonstrates the complete accounting process when a partner retires, including revaluing assets and liabilities, distributing reserves, accounting for goodwill, and finally preparing the updated balance sheet and partner's loan account.

🎯 Exam Tip: Pay close attention to the treatment of goodwill (old and new), revaluation adjustments, and the final settlement of the retiring partner's dues. Accuracy in calculations and correct posting to respective accounts are critical for full marks.

 

Question 7. Vijay, Laxmi and Siddhi are the partners sharing profit and loss in the ratio of 5 : 3 : 2. Siddhi retired on 1-4-2016. Terms of retirement were as under :
(1) New profit-loss sharing ratio of Vijay and Laxmi is 2 : 3.
(2) Goodwill of the firm is valued at Rs. 60,000.
(3) Market value of investments is Rs. 40,000. Siddhi will take over investment at this value.
(4) Rs. 3,000 to be written off from debtors and 5% bad debt reserve is to be maintained.
(5) Value of stock shown in the book is Rs. 1,000 more than its cost. It is to be recorded at cost.
(6) Claim of Rs. 7,000 is accepted for workmen compensation.
(7) Rs. 12,000 to be paid to Siddhi immediately.
Balance sheet of the firm on 31-3-2016 was as under :

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Land-building	1,30,000
Vijay	85,000	Machinery	70,000
Laxmi	64,000	Investments	60,000
Siddhi	71,000	2,20,000	Stock	35,000
Investment fluctuation fund	15,000	Debtors	23,000
Workmen compensation fund	17,000	Bad debt reserve	4,000	19,000
Creditors	56,000	Cash	36,000
Providend fund	42,000
	3,50,000		3,50,000

Prepare necessary accounts and balance sheet after retirement.

Answer:

The required accounts and the balance sheet are prepared as follows after Siddhi's retirement:

Dr. Revaluation Account Cr.

Particulars	Amt. (Rs.)	Particulars	Amt. (Rs.)
To Investments A/c	5,000	By Bad debts reserve A/c	3,000
To Bad debts A/c	3,000	By Loss : Partners Capital A/c
To Stock A/c	1,000	Vijay	3,000
		Laxmi	1,800
		Siddhi	1,200	6,000
	9,000		9,000

Dr. Partners Capital Accounts Cr.

Particulars	Vijay (Rs.)	Laxmi (Rs.)	Siddhi (Rs.)	Particulars	Vijay (Rs.)	Laxmi (Rs.)	Siddhi (Rs.)
To Vijay's Capital A/c (New Goodwill)	-	6,000	-	By Balance b/d	85,000	64,000	71,000
To Siddhi's Capital A/c (New Goodwill)	12,000	-	-	By Workmen Compensation Fund A/c	5,000	3,000	2,000
To Investments A/c	-	-	40,000	By Capital A/c of Laxmi (Goodwill)	6,000	-	-
To Cash A/c	-	-	12,000
To Revaluation A/c (Loss)	3,000	1,800	1,200
To Siddhi's Loan A/c	-	-	31,800
To Balance c/d	93,000	47,200	-
	96,000	67,000	85,000		96,000	67,000	85,000

Balance sheet as on 1-4-2016 after retirement

Capital-Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Land-Building	1,30,000
Vijay	93,000	Machines	70,000
Laxmi	47,200	1,40,200	Stock	34,000
Creditors	56,000	Debtors	23,000
Provident Fund	42,000	- B.D.	3,000	20,000
Siddhi's loan A/c	31,800	- B.D.R.	1,000	19,000
Workmen compensation claim	7,000	Cash	24,000
	2,77,000		2,77,000

Note :
(1) Gaining Ratio : Old ratio of Vijay, Laxmi and Siddhi = 5 : 3 : 2.
New ratio of Vijay and Laxmi = 2 : 3.
Gain = New share – Old share
Gain of Vijay = \( \frac{2}{5}-\frac{5}{10}=\frac{4-5}{10}=\frac{-1}{10} \) (sacrifice)
Gain of Laxmi = \( \frac{3}{5}-\frac{3}{10}=\frac{6-3}{10}=\frac{3}{10} \). Here only Laxmi has gain.
(2) Goodwill:
Goodwill received by Siddhi = Rs. 60,000 \( \times \frac{2}{10} \) = 12,000
Goodwill received by Vijay = Rs. 60,000 \( \times \frac{1}{10} \) = 6,000
Since Laxmi gains, the goodwill amount of Rs. 18,000 (Rs. 12,000 + Rs. 6,000) will be debited to her capital account and credited to Siddhi and Vijay's capital account Rs. 12,000 and Rs. 6,000 respectively.
(3) Book value of Investment Rs. 60,000 and its market value is Rs. 40,000.
Loss of investment Rs. 20,000; against which investment fluctuation fund Rs. 15,000, so, a different amount of Rs. 5,000 is debited to revaluation account.
(4) Amount of workmen compensation fund Rs. 17,000 from which amount of claim Rs. 7,000; so a different amount of Rs. 10,000 will be distributed between old partners in old ratio (5 : 3 : 2).

In simple words: This solution details the accounting adjustments required when a partner retires, specifically focusing on revaluation, goodwill, and the final settlement to the retiring partner, including preparing the updated financial statements.

🎯 Exam Tip: Accurately calculating gaining/sacrificing ratios and applying them to goodwill adjustments is crucial. Also, ensure all revaluation impacts on assets and liabilities, and the distribution of reserves, are correctly recorded.

 

Question 8. Jaya, Mamta and Smruti are the partners sharing profit and loss in the ratio of \(\frac{2}{5}, \frac{5}{10}\) and \(\frac{1}{10}\). Balance sheet of the firm on 31-3-2016 was as under :

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Creditors	90,000	Goodwill	30,000
General reserve	70,000	Building	2,82,000
Capital Accounts :		Machinery	1,45,000
Jaya	2,00,000	Investments	33,000
Mamta	1,00,000	Stock	20,000
Smruti	90,000	3,90,000	Debtors	50,000
Loan to Smruti	30,000
Current Accounts :		Current account : Smruti	10,000
Jaya	26,000
Mamta	14,000	40,000
Bad debt reserve	10,000
	6,00,000		6,00,000

Smruti retired on 1-4-2017 as a partner. At the time of her retirement, partners decided that:
(1) Rs. 4,000 is outstanding for rent payable.
(2) Interest on investment is receivable Rs. 2,500.
(3) Investments to be sold for Rs. 35,000.
(4) Goodwill of the firm is valued at Rs. 2,00,000.
(5) Jaya and Mamta will share future profit in the ratio of 1 : 1.
Prepare necessary accounts and balance sheet after retirement.

Answer:

The necessary accounts and the balance sheet after Smruti's retirement are prepared as follows:

Dr. Revaluation Account Cr.

Particulars	Amt. (Rs.)	Particulars	Amt. (Rs.)
To O/s Rent A/c	4,000	By Receivable interest on investment A/c	2,500
To Profit : Partners Capital A/c		By Investments A/c	2,000
Jaya	200
Mamta	250
Smruti	50	500
	4,500		4,500

Dr. Partners Current Accounts Cr.

Particulars	Jaya (Rs.)	Mamta (Rs.)	Smruti (Rs.)	Particulars	Jaya (Rs.)	Mamta (Rs.)	Smruti (Rs.)
To Balance b/d	-	-	10,000	By Balance b/d	26,000	14,000	-
To Goodwill A/c	12,000	15,000	3,000	By General Reserve A/c	28,000	35,000	7,000
To Smruti's Capital A/c (New goodwill)	20,000	-	-	By Revaluation A/c - Profit	200	250	50
To Smruti's Loan A/c	-	-	30,000	By Jaya's Current A/c	-	-	20,000
To Balance c/d	22,200	34,250	-	By Capital A/c of Smruti	-	-	15,950
	54,200	49,250	43,000		54,200	49,250	43,000

Dr. Partners' Capital Accounts Cr.

Particulars	Jaya (Rs.)	Mamta (Rs.)	Smruti (Rs.)	Particulars	Jaya (Rs.)	Mamta (Rs.)	Smruti (Rs.)
To Current A/c Smruti	-	-	15,950	By Balance b/d	2,00,000	1,00,000	90,000
To Smruti's Loan A/c	-	-	74,050
To Balance c/d	2,00,000	1,00,000	-
	2,00,000	1,00,000	90,000		2,00,000	1,00,000	90,000

Balance sheet as on 1-4-2016 after retirement

Capital-Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Building	2,82,000
Jaya	2,00,000	Machinery	1,45,000
Mamta	1,00,000	3,00,000	Debtors	50,000
Current Accounts :		Stock	20,000
Jaya	22,200	Outstanding interest on
Mamta	34,250	56,450	investments	2,500
Smruti's Loan A/c	74,050	Cash/Bank A/c
Creditors	90,000	(Sale of investments)	35,000
Outstanding rent	4,000
Bad debts reserve	10,000
	5,34,500		5,34,500

Note :
(1) Gaining Ratio : Old ratio of Jaya, Mamta and Smruti = \( \frac{2}{5}: \frac{5}{10}: \frac{1}{10} \) = 4 : 5 : 1.
New ratio of Jaya and Mamta = 1 : 1.
Gain = New share - Old share
Gain of Jaya = \( \frac{1}{2}-\frac{4}{10}=\frac{5-4}{10}=\frac{1}{10} \)
Gain of Mamta = \( \frac{1}{2}-\frac{5}{10}=\frac{5-5}{10} \) = 0
(2) Share of goodwill of Smruti = Rs. 2,00,000 \( \times \frac{1}{10} \) = 20,000. This amount is given by Jaya, as Mamta's gain is zero. Therefore, Rs. 20,000 will be debited to Jaya's current A/c and credited to Smruti's current A/c.
(3) The old goodwill amount of Rs. 30,000 shown in the balance sheet will be distributed among old partners in their old ratio (4 : 5 : 1).
(4) Stock is shown in books at 25% more than its cost. If the book value of stock is Rs. 125, the cost price is Rs. 100. If the book value of stock is Rs. 50,000, then its cost price is \( \frac{50,000 \times 100}{125} \) = Rs. 40,000. So, the difference amount of stock, Rs. 10,000, will be debited to the Revaluation account.

In simple words: This solution demonstrates the calculation of gaining ratios, accounting for goodwill, revaluing assets and liabilities, and distributing reserves and profits upon a partner's retirement, culminating in an updated balance sheet.

🎯 Exam Tip: Remember to adjust for any outstanding expenses or accrued income. Always clearly identify if old goodwill or general reserves are to be distributed or written off based on the partnership agreement.

 

Question 9. Madhav, Radha and Gopi are the partners sharing profit and loss in the ratio of \(\frac{1}{2}, \frac{1}{3}\) and \(\frac{1}{6}\). Balance sheet of the firm on 31-3-2016 was as under:

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Cash-bank	12,000
Madhav	1,36,000	Debtors	80,000
Radha	50,000	Bad debt reserve	5,000	75,000
Gopi	54,000	2,40,000	Stock	62,000
Creditors	50,000	Investments (Market value 64,000)	58,000
Workmen compensation reserve	24,000	Patent	35,000
Employee provident fund	15,000	Building	75,000
Investment fluctuation reserve	12,000	Advertisement campaign expenditure	24,000
	3,41,000		3,41,000

Radha retired on 1-4-2016. Partners decided that:
(1) Value of patent is to be reduced by 20% whereas value of building is to be reduced to 90%.
(2) Liability of workmen compensation reserve is decided at Rs. 30,000.
(3) Bad debt reserve on debtors is to be increased by 5%.
(4) Rs. 40,000 is to be paid to Radha as her share in goodwill.
(5) Rs. 500 received from bad debt written off earlier Rs. 3,000.
(6) Rs. 5,000 to be paid to Radha in cash and balance amount in two equal annual instalment with 10% interest per annum.
Prepare Revaluation account, Partners' capital account and Balance sheet. Also prepare Radha's loan account till it is finally paid.

Answer:

The Revaluation Account, Partners' Capital Accounts, and Balance Sheet after Radha's retirement, along with Radha's Loan Account, are prepared as follows:

Dr. Revaluation Account Cr.

Particulars	Amt. (Rs.)	Particulars	Amt. (Rs.)
To Patent A/c	7,000	By Bad debts recovered A/c	500
To Building A/c	7,500	By Investments A/c	6,000
To Workmens' compensation reserve A/c	6,000	By Loss : Partners capital A/c
To Bad debts reserve A/c	4,000	Madhav	9,000
		Radha	6,000
		Gopi	3,000	18,000
	24,500		24,500

Dr. Partners Capital Accounts Cr.

Particulars	Madhav (Rs.)	Radha (Rs.)	Gopi (Rs.)	Particulars	Madhav (Rs.)	Radha (Rs.)	Gopi (Rs.)
To Adv. Campaign Exp. A/c	12,000	8,000	4,000	By Balance b/d	1,36,000	50,000	54,000
To Revaluation A/c (Loss)	9,000	6,000	3,000	By Investment fluctuation fund A/c	6,000	4,000	2,000
To Cash A/c	-	5,000	-	By Madhav's capital A/c(New Goodwill)	-	30,000	-
To Radha's capital A/c (Goodwill)	30,000	-	10,000	By Gopi's capital A/c (New Goodwill)	-	10,000	-
To Radha's Loan A/c	-	75,000	-
To Balance c/d	91,000	-	39,000
	1,42,000	94,000	56,000		1,42,000	94,000	56,000

Balance sheet as on 1-4-2016 after retirement

Capital-Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts:		Building	67,500
Madhav	91,000	Patents	28,000
Gopi	39,000	1,30,000	Investments	64,000
Creditors	50,000	Stock	62,000
Workmens' compensation reserve	30,000	Debtors	80,000
Radha's loan	75,000	BDR	9,000	71,000
Employees provident fund	15,000	Cash Balance	7,500
	3,00,000		3,00,000

Dr. Cash Account Cr.

Particulars	Amt. (Rs.)	Particulars	Amt. (Rs.)
To Balance b/d	12,000	By Radha's capital A/c	5,000
To Bad debts return A/c	500	By Balance c/d	7,500
	12,500		12,500

Dr. Radha's Loan Account Cr.

Date	Particulars	Amt. (Rs.)	Date	Particulars	Amt. (Rs.)
31-3-17	To Cash A/c (37500+7500)	45,000	1-4-16	By Radha's capital A/c	75,000
31-3-17	To Balance c/d	37,500	31-3-17	By Interest A/c	7,500
	82,500		82,500
31-3-18	To Cash A/c (37500+3750)	41,250	1-4-17	By Balance b/d	37,500
		31-3-18	By Interest A/c	3,750
	41,250		41,250

Note :
(1) Gaining Ratio :
Old ratio of Madhav, Radha and Gopi = \( \frac{1}{2}: \frac{1}{3}: \frac{1}{6} \) = 3 : 2 : 1.
Here, New ratio is not given after retirement of Radha, so new ratio of Madhav and Gopi = Old ratio = Gaining ratio = 3 : 1.
(2) Share of Radha's goodwill = Rs. 40,000, which will be given to Madhav and Gopi in their gaining ratio (3: 1).

In simple words: This problem involves the complete accounting process for partner retirement, including revaluing assets, adjusting liabilities, recording goodwill, settling the retiring partner's dues (partially in cash, partially as a loan), and preparing the updated financial statements.

🎯 Exam Tip: When dealing with partner retirement, meticulously calculate revaluation gains/losses, properly adjust for goodwill, and correctly manage the retiring partner's loan instalments with interest to avoid errors.

 

Question 10. Deep, Jyoti and Geeta are the partners sharing profit and loss in the ratio of their capitals. Balance sheet of their firm as 31-3-2017 was as under :

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Goodwill	14,000
Deep	1,00,000	Land-building	2,90,000
Jyoti	1,50,000	Trademark	60,000
Geeta	1,00,000	3,50,000	Stock	50,000
General reserve	28,000	Debtors	40,000
Creditors	60,000	- Bad debt reserve	6,000	34,000
Provident fund	32,000	Bank	22,000
	4,70,000		4,70,000

Jyoti retired on the above date. Partners decided that,
(1) New profit and loss sharing ratio of Deep and Geeta is to be kept at 1:1.
(2) Goodwill of the firm valued at Rs. 70,000.
(3) Bad debt reserve on debtors is to be reduced upto 10%.
(4) Stock is shown in the books at 25% more than its cost, stock to be recorded at cost.
(5) Rs. 60,000 is paid for trademark during current year, which is for total 6 years.
(6) Liability of provident fund is decided at Rs. 35,000.
(7) Total capital of the new firm is to be kept as the total capital of the old firm. Deep and Geeta will maintain this capital in their new profit-loss sharing ratio. For this purpose the difference is to be transferred to their current accounts.
Prepare necessary accounts and balance sheet after retirement.

Answer:

The necessary accounts and balance sheet after Jyoti's retirement are prepared as follows:

Dr. Revaluation Account Cr.

Particulars	Amt. (Rs.)	Particulars	Amt. (Rs.)
To Stock A/c	10,000	By Bad debts reserve A/c	2,000
To Trademark A/c	10,000	By Loss : Partners capital A/c
To Provident Fund A/c	3,000	Deep	6,000
		Jyoti	9,000
		Geeta	6,000	21,000
	23,000		23,000

Dr. Partners' Capital Accounts Cr.

Particulars	Deep (Rs.)	Jyoti (Rs.)	Geeta (Rs.)	Particulars	Deep (Rs.)	Jyoti (Rs.)	Geeta (Rs.)
To Revaluation A/c	6,000	9,000	6,000	By Balance b/f	1,00,000	1,50,000	1,00,000
To Goodwill A/c	4,000	6,000	4,000	By General reserve A/c	8,000	12,000	8,000
To Jyoti's capital A/c	15,000	-	15,000	By Deep's capital A/c (New goodwill)	-	15,000	-
To Jyoti's Loan A/c	-	1,77,000	-	By Geeta's capital A/c (New goodwill)	-	15,000	-
To Balance c/f	1,75,000	-	1,75,000	By Current A/c	92,000	-	92,000
	2,00,000	1,92,000	2,00,000		2,00,000	1,92,000	2,00,000

Balance sheet as on 1-4-2017 after retirement

Capital-Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Land-Building	2,90,000
Deep	1,75,000	Trademark	50,000
Geeta	1,75,000	3,50,000	Stock	40,000
Creditors	60,000	Debtors	40,000
Provident Fund	35,000	- B.D.R.	4,000	36,000
Jyoti's loan A/c	1,77,000	Bank	22,000
Current Accounts :		Current Accounts :
Deep	92,000	Deep	92,000
Geeta	92,000	92,000
	6,22,000		6,22,000

Note :
(1) Gaining Ratio : Old ratio of Deep, Jyoti and Geeta (capital ratio) = 1,00,000 : 1,50,000 : 1,00,000 = 2 : 3 : 2.
New ratio of Deep and Jyoti = 2 : 2 = 1 : 1.
Gain = New share - Old share.
Gain of Deep = \( \frac{1}{2}-\frac{2}{7}=\frac{7-4}{14}=\frac{3}{14} \)
Gain of Geeta = \( \frac{1}{2}-\frac{2}{7}=\frac{7-4}{14}=\frac{3}{14} \)
Gaining ratio of Deep and Geeta = 3 : 3 = 1 :1
(2) Share of Jyoti's goodwill = Rs. 70,000 \( \times \frac{3}{7} \) = Rs. 30,000, which will be given to Deep and Geeta in their gaining ratio (1 : 1).
(3) Amount of old goodwill shown in the balance sheet will be distributed between old partners in their old ratio (2 : 3 : 2).
(4) Stock is shown in books at 25% more than its cost. If the book value is Rs. 125, the cost price is Rs. 100. If the book value of stock is Rs. 50,000, then its cost price is Rs. \( \frac{50,000 \times 100}{125} \) = 40,000. So, the difference amount of stock, Rs. 10,000, will be debited to Revaluation account.

In simple words: This solution provides the detailed accounting procedures for a partner's retirement, covering capital ratio adjustments, goodwill valuation, asset and liability revaluation, and the transfer of capital differences to current accounts to maintain a new capital structure, presented in the final balance sheet.

🎯 Exam Tip: When the new capital structure is based on the old firm's total capital and a new profit-sharing ratio, ensure correct calculation of new capital for continuing partners and properly account for any surplus or deficit via cash or current accounts.

 

Question 11. Moon, Star and Sun are the partners of a firm. Sun retires on 31-3-2017. Moon and Star will distribute future profit and loss in the ratio of 5 : 1. Balance sheet of their firm on 31-3-2017 was as under :

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Building	2,40,000
Moon	1,60,000	Machinery	1,30,000
Star	2,00,000	Furniture	80,000
Sun	1,80,000	5,40,000	Stock	45,000
General reserve	90,000	Debtors	30,000
Creditors	60,000	Bank	1,75,000
Bills payable	10,000
	7,00,000		7,00,000

Conditions of retirement were as under :
(1) Goodwill of the firm is valued at Rs. 60,000.
(2) Creditors are payable after one month, which are to be paid immediately at 12% discount per annum.
(3) Computer, written off from the books is now valued at Rs. 12,000. Moon will take over the computer at this value.
(4) After retirement of Sun, Moon and Star will maintain their capital in the new profit and loss sharing ratio and difference is to be transferred to bank account.
Prepare necessary accounts and balance sheet after retirement.

Answer:

The necessary accounts and balance sheet after Sun's retirement are prepared as follows:

Dr. Revaluation Account Cr.

Particulars	Amt. (Rs.)	Particulars	Amt. (Rs.)
To Profit : Partners Capital A/c		By Computer A/c	12,000
Moon	4,200	By Discount to Creditors A/c	600
Star	4,200
Sun	4,200	12,600
	12,600		12,600

Dr. Partners Capital Accounts Cr.

Particulars	Moon (Rs.)	Star (Rs.)	Sun (Rs.)	Particulars	Moon (Rs.)	Star (Rs.)	Sun (Rs.)
To Star's capital A/c (New goodwill)	10,000	-	-	By Balance b/d	1,60,000	2,00,000	1,80,000
To Sun's capital A/c (New goodwill)	20,000	-	-	By General reserve A/c	30,000	30,000	30,000
To Computer A/c	12,000	-	-	By Revaluation A/c	4,200	4,200	4,200
To Sun's Loan A/c	-	-	2,34,200	By Moon's capital A/c (New goodwill)	-	10,000	20,000
To Bank A/c	-	-	1,78,133	By Bank/Cash A/c	1,78,133	-	-
To Balance c/d	3,30,333	66,067	-
	3,72,333	2,44,200	2,34,200		3,72,333	2,44,200	2,34,200

Dr. Bank Account Cr.

Particulars	Amt. (Rs.)	Particulars	Amt. (Rs.)
To Balance b/d	1,75,000	By Creditors A/c	59,400
To Moon's capital A/c	1,78,133	By Star's capital A/c	1,78,133
		By Balance c/d	1,15,600
	3,53,133		3,53,133

Balance sheet as on 1-4-2017 after retirement

Capital-Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Building	2,40,000
Moon	3,30,333	Machines	1,30,000
Star	66,067	3,96,400	Furniture	80,000
Bills payable	10,000	Stock	45,000
Sun's Loan A/c	2,34,200	Debtors	30,000
		Bank balance	1,15,600
	6,40,600		6,40,600

Note :
(1) Gaining Ratio : Old ratio of Moon, Star and Sun = 1 : 1 : 1.
New ratio of Moon and Star = 5 : 1
Gain = New share - Old share.
Gain of Moon = \( \frac{5}{6}-\frac{1}{3}=\frac{5-2}{6}=\frac{3}{6} \)
Gain of Star = \( \frac{1}{6}-\frac{1}{3}=\frac{1-2}{6}=\frac{-1}{6} \) (Sacrifice)
Only Moon will get the gain.
(2) Goodwill:
Goodwill received by Sun = Rs. 60,000 \( \times \frac{1}{3} \) = Rs. 20,000
Goodwill received by Star (Sacrifice) = Rs. 60,000 \( \times \frac{1}{6} \) = 10,000
Total amount of goodwill received by Moon (gain) = Rs. 20,000 + Rs. 10,000 = Rs. 30,000, which will be debited to his capital account and credited to Sun and Star's capital account Rs. 20,000 and Rs. 10,000 respectively.
(3) Discount received on payment of creditors = Rs. 60,000 \( \times \frac{12}{100} \times \frac{1}{12} \) = Rs. 600
(4) Computer written off from the book at Rs. 12,000 will be profit, so it will be credited to revaluation account.
(5) Capital of Moon and Star in the new firm will be kept in new profit-loss sharing ratio (5 : 1).
Capital of Moon (1,94,200 - 42,000) = 1,52,200
Capital of Star = 2,44,200
Total capital of new firm = 3,96,400
New Capital of Moon = Rs. 3,96,400 \( \times \frac{5}{6} \) = 3,30,333
New Capital of Star = Rs. 3,96,400 \( \times \frac{1}{6} \) = 66,067
Here, Moon will bring Rs. 1,78,133 and Star will withdraw Rs. 1,78,133.

In simple words: This solution guides through the comprehensive accounting adjustments for a partner's retirement, including revaluation, goodwill, and re-establishing the capital structure of the continuing partners, ensuring all financial records are updated and presented in the final balance sheet.

🎯 Exam Tip: Pay meticulous attention to calculating the new profit-sharing ratio and its impact on capital adjustments. Ensure that any differences in capital are accurately transferred to the bank account as per the partnership agreement.

 

Question 12. E, M and I are partners sharing profit and loss in the ratio of 5 : 3 : 2. Balance sheet of their firm on 31-3-2015 was as under:

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Building	1,20,000
E	60,000	Machinery	80,000
M	30,000	Stock	30,000
I	50,000	1,40,000	Debtors	40,000
Reserve fund	50,000	Bad debt reserve	2,000	38,000
Workmen profit sharing fund	30,000	Cash	22,000
Creditors	70,000
	2,90,000		2,90,000

I retired on 31-3-2017. Conditions of retirement were as under:
(1) I's profit share will be gained by E and M in the ratio of 2 : 3.
(2) Goodwill of the firm is valued at Rs. 1,00,000.
(3) Bad debt reserve on debtors is to be increased by 10%.
(4) Building is valued at 110%.
(5) Value of machinery is to be reduced by 10 %.
(6) Annual premium of Rs. 24,000 is paid for the year ended on 30-6-2017.
(7) E and M will maintain total capital of the firm Rs. 1,00,000 in their new profit and loss sharing ratio after retirement of I. Prepare necessary accounts and balance sheet after retirement.
Answer:

The necessary Revaluation Account, Partners' Capital Accounts, Cash Account, and the Balance Sheet after I's retirement are prepared as follows:
Revaluation Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Bad debts reserve A/c	4,000	By Building A/c	12,000
To Machinery A/c	8,000	By Prepaid insurance premium A/c	6,000
To Profit : Partners capital A/c
E	3,000
M	1,800
I	1,200	6,000
	18,000		18,000

Partners' Capital Accounts

Dr. Particulars	E (Rs.)	M (Rs.)	I (Rs.)	Cr. Particulars	E (Rs.)	M (Rs.)	I (Rs.)
To I's Capital A/c (Goodwill)	8,000	12,000	-	By Balance b/f	60,000	30,000	50,000
To I's Loan A/c	-	-	81,200	By Reserve Fund A/c	25,000	15,000	10,000
To Cash A/c	22,000	-	-	By Revaluation A/c	3,000	1,800	1,200
To Balance c/f	58,000	42,000	-	By E's Capital A/c (New goodwill)	-	-	8,000
				By M's Capital A/c (New goodwill)	-	-	12,000
				By Cash A/c	-	7,200	-
	88,000	54,000	81,200		88,000	54,000	81,200

Cash Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Balance b/d	22,000	By E's Capital A/c	22,000
To M's Capital A/c	7,200	By Balance c/d	7,200
	29,200		29,200

Balance sheet as on 1-4-2017 after retirement

Capital-Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Building	1,32,000
E	58,000	Machinery	72,000
M	42,000	1,00,000	Stock	30,000
Workmens' profit sharing fund	30,000	Debtors	40,000
Creditors	70,000	- BDR	6,000	34,000
I's Loan A/c	81,200	Prepaid Insurance Premium	6,000
		Cash balance	7,200
	2,81,200		2,81,200

Note:
(1) Gaining Ratio: The old profit and loss sharing ratio for E, M, and I is 5:3:2. Upon I's retirement, the new profit and loss sharing ratio for E and M is 2:1.
Gain is calculated as: New share - Old share.
Gain of E = \( \frac{2}{3} - \frac{5}{10} = \frac{4-5}{10} = \frac{-1}{10} \) (Sacrifice).
Gain of M = \( \frac{1}{3} - \frac{3}{10} = \frac{10-9}{30} = \frac{1}{30} \)
From the context provided for Question 13, it looks like there was an intended calculation of gaining ratio for E and M. Given the problem statement "I's profit share will be gained by E and M in the ratio of 2 : 3", the gaining ratio is directly provided as 2:3, not calculated from new/old shares in this manner. Let's re-evaluate based on the provided solution's "Note" from a later page for Q13, which is likely intended for Q12 here. The gaining ratio for E and M is 2:3.
(2) Goodwill: I's share of goodwill is calculated as Rs. 1,00,000 x \( \frac{2}{10} \) = Rs. 20,000. This amount is to be provided by E and M in their gaining ratio of 2:3.
(3) Total capital for the new firm is maintained at Rs. 1,00,000, distributed between E and M in their new profit-loss sharing ratio of 2:1. E's new capital is Rs. 1,00,000 x \( \frac{2}{3} \) = Rs. 66,667, and M's new capital is Rs. 1,00,000 x \( \frac{1}{3} \) = Rs. 33,333. To achieve this, E will withdraw cash, and M will bring in cash.
In simple words: This problem involves adjusting accounts and preparing a new balance sheet when a partner retires. Key steps include revaluing assets and liabilities, calculating goodwill share for the retiring partner, and adjusting remaining partners' capital to their new profit-sharing ratio, with any differences settled in cash.

🎯 Exam Tip: Focus on accurately calculating revaluation gains/losses, distributing reserves and goodwill, and correctly adjusting capital accounts based on the new profit-sharing and gaining ratios. Ensure the final balance sheet balances.

 

Question 13. L, B and W are the partners of a firm sharing profit and loss in the ratio of 2 : 2 : 1. Balance sheet of their firm on 31-3-2016 was as under:

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Goodwill	8,000
L	20,000	Building	37,000
B	12,500	Debtors	13,000
W	5,000	37,500	Stock	5,500
General reserve	5,000	Cash	2,000
Creditors	20,000
Outstanding expenses	3,000
	65,500		65,500

W retired on 1-4-2016. Terms of retirement were decided as under:
(1) Market value of building is Rs. 50,000.
(2) Book value of stock is 10% more than its cost. Stock is to be recorded at its cost.
(3) Personal expenses of W Rs. 500 was debited to profit and loss account.
(4) Goodwill of the firm is valued at Rs. 80,000.
(5) L will gain \(\frac{5}{40}\) and B will gain \(\frac{3}{40}\) from W's share of profit.
(6) Amount due to W is to be paid in cash and the same amount will be brought in cash by L and B in such a manner that their capital accounts and balance sheet of the new firm become proportionate to their new profit-loss sharing ratio in the new firm. Prepare necessary accounts and balance sheet of the new firm.
Answer:

The necessary Revaluation Account, Partners' Capital Accounts, Cash Account, and the Balance Sheet after W's retirement are prepared as follows:
Revaluation Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Stock A/c	500	By Building A/c	13,000
To Profit : Partners Capital A/c		By Personal Expense of W	500
L	5,200
B	5,200
W	2,600	13,000
	13,500		13,500

Partners' Capital Accounts

Dr. Particulars	L (Rs.)	B (Rs.)	W (Rs.)	Cr. Particulars	L (Rs.)	B (Rs.)	W (Rs.)
To Goodwill A/c (old)	3,200	3,200	1,600	By Balance b/f	20,000	12,500	5,000
To Revaluation A/c	-	-	500	By General reserve A/c	2,000	2,000	1,000
To W's Capital A/c (goodwill)	10,000	6,000	-	By Revaluation A/c	5,200	5,200	2,600
To Cash A/c	-	-	22,500	By Capital A/c of L (goodwill)	-	-	10,000
To Balance c/f	24,675	22,325	-	By Capital A/c of B (goodwill)	-	-	6,000
				By Cash A/c	10,675	11,825	-
	37,875	31,525	24,600		37,875	31,525	24,600

Cash Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Balance b/d	2,000	By W's Capital A/c	22,500
To L's Capital A/c	10,675	By Balance c/f	2,000
To B's Capital A/c	11,825
	24,500		24,500

Balance sheet as on 1-4-2016 after retirement

Capital-Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Building	50,000
L	24,675	Debtors	13,000
B	22,325	47,000	Stock	5,000
Creditors	20,000	Cash	2,000
O/s expenses	3,000
	70,000		70,000

Note:
(1) New Profit and Loss Ratio: The old ratio for E, M, and I is 2:2:1. Upon W's retirement, L receives \(\frac{5}{40}\) and B receives \(\frac{3}{40}\) from W's share of profit, establishing a gaining ratio of 5:3.
The new share is calculated as: Old share + Gain.
L's new share = \( \frac{2}{5} + \frac{5}{40} = \frac{16+5}{40} = \frac{21}{40} \)
B's new share = \( \frac{2}{5} + \frac{3}{40} = \frac{16+3}{40} = \frac{19}{40} \)
Thus, the new profit-loss sharing ratio for L and B is 21:19.
(2) Goodwill: W's share of goodwill is Rs. 80,000 x \(\frac{1}{5}\) = Rs. 16,000. This amount is to be provided by L and B in their gaining ratio of 5:3.
(3) Old goodwill appearing in the balance sheet, amounting to Rs. 8,000, is to be written off among old partners in their old ratio of 2:2:1.
(4) The amount paid to retired partner W is Rs. 22,500. This sum is debited to W's capital account and credited to the cash account.
(5) In the new balance sheet, the closing cash balance is Rs. 2,000. The total assets and liabilities balance at Rs. 70,000.
(6) On the liability side, after deducting creditors (Rs. 20,000) and unpaid expenses (Rs. 3,000) from the total liability of Rs. 70,000, the remaining amount of Rs. 47,000 represents the capital of L and B. This capital is distributed in their new profit-loss sharing ratio of 21:19.
New capital of L = Rs. 47,000 x \(\frac{21}{40}\) = Rs. 24,675.
New capital of B = Rs. 47,000 x \(\frac{19}{40}\) = Rs. 22,325.
(7) This capital balance is shown on the debit side of the capital accounts for L and B. The difference amount (Rs. 10,675 for L and Rs. 11,825 for B) is debited to the cash account, representing cash brought in by them to maintain their new capital and pay off W.
In simple words: This question demonstrates the accounting process when a partner retires, involving revaluation of assets, adjusting for goodwill and personal expenses, and ensuring the remaining partners' capital is proportionate to their new profit-sharing ratio, with cash adjustments as needed.

🎯 Exam Tip: Pay close attention to revaluation adjustments, particularly for stock when it's overvalued. Correctly calculate the retiring partner's share of goodwill and how it's compensated by gaining partners. Ensure cash adjustments maintain the firm's working capital requirement.

 

Question 14. Chirag, Jigar and Keshav are the partners sharing profit and loss in ratio of 3 : 2 : 1. Balance sheet of their firm on 31-3-2016 was as under:

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Account :		Land-building	50,000
Chirag	30,000	Machinery	20,000
Jigar	20,000	Investments	10,000
Keshav	10,000	60,000	Stock	10,000
General reserve	6,000	Debtors	20,000
Creditors	44,000	Bad debt reserve	2,000	18,000
		Cash	2,000
	1,10,000		1,10,000

Keshav retired on 31-3-2016. Following conditions were decided at the time of retirement:
(1) Land-building is to be increased by 20%.
(2) Machinery is valued at 90% of its book value.
(3) Market value of investment is 150% of its book value.
(4) Bad debt reserve on debtors is to be reduced by 5%.
(5) Goodwill of the firm is valued at Rs. 36,000.
(6) Rs. 2,000 is outstanding for salary payable to an employee.
(7) Chirag and Jigar will bring necessary amount in cash in such a manner that amount due to Keshav is to be paid in cash and balance of cash may remain in the firm as working capital Rs. 14,000 and their capital in the new firm become proportionate to their new profit-loss sharing ratio. Prepare necessary accounts and balance sheet of new firm.
Answer:

The required Revaluation Account, Partners' Capital Accounts, Cash Account, and the Balance Sheet after Keshav's retirement are prepared as follows:
Revaluation Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Machinery A/c	2,000	By Land-Building A/c	10,000
To O/s Salary A/c	2,000	By Investments A/c	5,000
To Profit : Partners Capital A/c		By Bad debts reserve A/c	1,000
Chirag	6,000
Jigar	4,000
Keshav	2,000	12,000
	16,000		16,000

Partners' Capital Accounts

Dr. Particulars	Chirag (Rs.)	Jigar (Rs.)	Keshav (Rs.)	Cr. Particulars	Chirag (Rs.)	Jigar (Rs.)	Keshav (Rs.)
To Keshav's capital A/c (goodwill)	3,600	2,400	-	By Balance b/d	30,000	20,000	10,000
To Cash A/c	-	-	19,000	By Revaluation A/c	6,000	4,000	2,000
To Balance c/d	54,000	36,000	-	By General reserve A/c	3,000	2,000	1,000
				By Chirag's capital A/c (Goodwill)	-	-	3,600
				By Jigar's capital A/c (Goodwill)	-	-	2,400
				By Cash A/c	18,600	12,400	-
	57,600	38,400	19,000		57,600	38,400	19,000

Cash Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Balance b/d	2,000	By Keshav's capital A/c	19,000
To Chirag's Capital A/c	18,600	By Balance c/d (working capital)	14,000
To Jigar's Capital A/c	12,400
	33,000		33,000

Balance sheet as on 1-4-2016 after retirement

Capital-Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Land-Building	60,000
Chirag	54,000	Machinery	18,000
Jigar	36,000	90,000	Investments	15,000
Creditors	44,000	Stock	10,000
Outstanding Salary	2,000	Debtors	20,000
		- B.D.R.	1,000	19,000
		Cash	14,000
	1,36,000		1,36,000

Note:
(1) Gaining Ratio and New Profit and Loss Ratio: The old profit-loss sharing ratio of Chirag, Jigar, and Keshav is 3:2:1. Since no new ratio information is provided after Keshav's retirement, the new ratio for Chirag and Jigar will remain their old ratio, which is 3:2. This also represents their gaining ratio.
(2) Keshav's share of goodwill is Rs. 36,000 x \(\frac{1}{6}\) = Rs. 6,000. This amount will be paid by Chirag and Jigar in their gaining ratio of 3:2.
(3) Calculation of new capital for Chirag and Jigar in the new firm:
(i) The amount of Rs. 19,000 paid to Keshav is debited from his capital account and credited to the cash account.
(ii) The closing balance for cash is Rs. 14,000, which is shown on the asset side of the new balance sheet. The total assets side amounts to Rs. 1,36,000, and the liabilities side also totals Rs. 1,36,000.
(iii) On the liability side, after subtracting total external liabilities (creditors Rs. 44,000 + unpaid salary Rs. 2,000 = Rs. 46,000) from the total liabilities (Rs. 1,36,000), the remaining Rs. 90,000 constitutes the capital for Chirag and Jigar. This capital will be distributed in their new profit-loss sharing ratio of 3:2.
New capital of Chirag = Rs. 90,000 x \(\frac{3}{5}\) = Rs. 54,000.
New capital of Jigar = Rs. 90,000 x \(\frac{2}{5}\) = Rs. 36,000.
(iv) These capital balances are presented on the debit side of Chirag's and Jigar's capital accounts. The difference amounts (Rs. 18,600 for Chirag and Rs. 12,400 for Jigar) on the credit side of their capital accounts are debited to the cash account, representing cash brought in to meet the new capital requirements.
In simple words: This problem involves a partner's retirement, requiring revaluation of assets, adjustment of goodwill, and recalculation of capital for the remaining partners to align with their new profit-sharing ratio, with cash transactions to settle balances.

🎯 Exam Tip: Remember to adjust for all revaluation impacts, correctly allocate goodwill, and ensure that the cash adjustments reflect the required working capital and the final capital contributions of the continuing partners.

 

Question 15. E, F and G are the partners sharing profit and loss in the ratio of 4 : 3 : 3. E retires on 31-3-2017. Balance sheet of the firm on that date was as under:

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Goodwill	1,000
E	8000	Land-building	6,000
F	5000	Free hold assets	3,000
G	2000	15,000	Furniture	3,000
General reserve	2,000	Stock	6,600
Creditors	8,000	Debtors	7,000
Bills payable	2,000	Cash	400
	27,000		27,000

Following terms of retirement were decided in partnership agreement and among the partners:
(1) Goodwill of the firm is valued at Rs. 7,000.
(2) Value of land-building Rs. 7,000 and furniture Rs. 2,000 is decided.
(3) Stock is over valued by 10%.
(4) Rs. 5000 to be paid to E immediately and balance to be transferred to his loan account.
(5) F and G will bring necessary cash in equal proportion in such a manner that E is to be paid his dues fully and Rs. 2,000 remain as working capital (cash).
Prepare profit and loss adjustment account, cash account, partners' capital accounts and balance sheet.
Answer:

The Revaluation Account, Partners' Capital Accounts, Cash Account, and the Balance Sheet after E's retirement are prepared as follows:
Revaluation Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Furniture A/c	1,000	By Land-Building A/c	1,000
To Stock A/c	600	By Loss : Partners' Capital A/c
		E	240
		F	180
		G	180	600
	1,600		1,600

Partners' Capital Accounts

Dr. Particulars	E (Rs.)	F (Rs.)	G (Rs.)	Cr. Particulars	E (Rs.)	F (Rs.)	G (Rs.)
To Goodwill A/c (old)	400	300	300	By Balance b/d	8,000	5,000	2,000
To E's Capital A/c (New goodwill)	-	1,400	1,400	By General reserve A/c	800	600	600
To Revaluation A/c	240	180	180	By F's capital A/c (New goodwill)	-	-	1,400
To Cash A/c	5,000	-	-	By G's capital A/c (New goodwill)	-	-	1,400
To E's Loan A/c	5,960	-	-	By Cash A/c	-	3,300	3,300
To Balance c/d	-	7,020	4,020
	11,600	8,900	5,900		11,600	8,900	5,900

Cash Account

Dr. Particulars	Amt. (Rs.)	Cr. Particulars	Amt. (Rs.)
To Balance b/d	400	By E's Capital A/c	5,000
To F's Capital A/c	3,300	By Balance c/d	2,000
To G's Capital A/c	3,300
	7,000		7,000

Balance sheet as on 1-4-2017 after retirement

Capital-Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Land-Building	7,000
F	7,020	Freehold assets	3,000
G	4,020	11,040	Furniture	2,000
Creditors	8,000	Stock	6,000
Bills payable	2,000	Debtors	7,000
E's Loan	5,960	Cash	2,000
	27,000		27,000

Note:
(1) New Profit and Loss Ratio and Gaining Ratio: The old profit-loss sharing ratio of E, F, and G is 4:3:3. After E's retirement, no new ratio is explicitly given, so the new ratio for F and G remains their old ratio of 3:3, simplifying to 1:1. This also serves as their gaining ratio.
(2) E's share of goodwill is calculated as Rs. 7,000 x \(\frac{4}{10}\) = Rs. 2,800. This amount will be contributed by F and G in their gaining ratio of 1:1.
(3) The old goodwill of Rs. 1,000 shown in the balance sheet is written off among all partners in their old profit-loss sharing ratio of 4:3:3.
(4) The amount payable to retiring partner E is Rs. 5,000. Additionally, Rs. 2,000 is to be maintained as working capital. The total cash required is Rs. 7,000. Considering the opening cash balance of Rs. 400, a difference of Rs. 6,600 needs to be brought in. This amount will be contributed by F and G in equal proportion (Rs. 3,300 each).
In simple words: This problem covers partner retirement adjustments, including revaluing assets like land-building and furniture, correcting stock valuation, accounting for firm goodwill, and ensuring the retiring partner is paid off while maintaining adequate working capital.

🎯 Exam Tip: Accurately calculate revaluation gains or losses for assets and liabilities. Pay special attention to the adjustment of capital accounts to reflect the new profit-sharing ratio and the cash contributions needed from continuing partners to settle the retiring partner's dues and maintain working capital.

 

Question 16. Kamal, Bimal and Vimal have capital balances of Rs. 10,000, Rs. 20,000, and Rs. 30,000 respectively. The firm has a General Reserve of Rs. 24,000, a Loan from Vimal of Rs. 10,000, and Goodwill of Rs. 12,000. Vimal died on 31-5-2016. The partnership deed stipulated the following conditions:
(1) Goodwill of the firm is to be valued at two years' purchase of the average profit of the last three years. The profits for the last three years were Rs. 25,000, Rs. 40,000, and Rs. 25,000.
(2) Vimal's share of profit up to the date of death is to be calculated based on the average profit of the last three years.
(3) Interest on capital is to be allowed at 12% per annum. Prepare Vimal's capital account.

Answer:

The Vimal's Capital Account is prepared as follows:
Vimal's Capital Account

Dr. Date	Particulars	Amt. (Rs.)	Cr. Date	Particulars	Amt. (Rs.)
31-5-16	To Goodwill A/c(old)	6,000	31-5-16	By Balance b/d	30,000
31-5-16	To Vimal's Loan A/c	79,200	31-5-16	By General Reserve A/c	12,000
			31-5-16	By Vimal's Loan A/c	10,000
			31-5-16	By Int. on Vimal's Loan A/c	100
			31-5-16	By Kamal's Capital A/c (Goodwill)	10,000
			31-5-16	By Bimal's Capital A/c (Goodwill)	20,000
			31-5-16	By Profit-loss suspense A/c (Share in profit)	2,500
			31-5-16	By Interest on Capital	600
	85,200			85,200

Note:
(1) Goodwill: The old goodwill of Rs. 12,000 is written off among partners in their old profit-sharing ratio of 1:2:3. Vimal's share is Rs. 12,000 x \(\frac{3}{6}\) = Rs. 6,000.
The new goodwill is calculated based on the average profit of the last three years:
Average Profit = \(\frac{25,000 + 40,000 + 25,000}{3}\) = Rs. 30,000.
Goodwill of the firm = Average Profit x Number of years' purchase = Rs. 30,000 x 2 = Rs. 60,000.
Vimal's share of goodwill = Rs. 60,000 x \(\frac{3}{6}\) = Rs. 30,000. This amount is contributed by Kamal and Bimal in their gaining ratio. Assuming their old ratio (1:2) is the gaining ratio, Kamal contributes Rs. 10,000 and Bimal Rs. 20,000.
(2) Vimal's share in profit until the date of death (2 months: April, May) is calculated based on the last three years' average profit:
Profit share = Rs. 30,000 (Avg. Profit) x \(\frac{2}{12}\) (months) x \(\frac{3}{6}\) (Vimal's share) = Rs. 2,500.
(3) Interest on capital for Vimal is allowed at 12% p.a. for 2 months: Rs. 30,000 x \(\frac{12}{100}\) x \(\frac{2}{12}\) = Rs. 600.
(4) Interest on Vimal's loan of Rs. 10,000 is calculated for 2 months at 6% p.a. (as per Indian Partnership Act in absence of deed clause) which should be Rs. 10,000 x \(\frac{6}{100}\) x \(\frac{2}{12}\) = Rs. 100. However, the provided solution uses \(\frac{6}{100}\) assuming 6% which is correct for partnership act. It might be calculated for more months in the solution. Let's recheck. Vimal died on 31-5-2016, loan from Vimal is Rs 10,000. It doesn't state when the loan was given. Assuming the loan was outstanding for two months (April and May) for the period for which Vimal was alive. So, Rs. 10,000 x 12/100 x 2/12 = Rs. 200, not Rs. 100. If 6% interest applies (as per the Indian Partnership Act in absence of a deed clause or explicit rate for loan), then 10,000 * 6/100 * 2/12 = 100. The problem statement says "Interest on loan = 10,000 x 6/100 x 2/12 = 100". This confirms 6% and 2 months.
In simple words: This problem involves accounting for a partner's death, calculating their share of profits and goodwill up to the date of death, distributing general reserves, and charging interest on capital and loan as per the partnership deed.

🎯 Exam Tip: When a partner dies, carefully calculate their share of profits and goodwill for the period they were alive. Remember to account for interest on capital and loans as per the deed, and ensure all adjustments are made to their capital account before transferring the final balance to their executor's account.

 

Question 17. C, S and T are the partners of a firm sharing profit and loss in the ratio of 2 : 1 : 2. Balance sheet of their firm on 31-3-2017 was as under:

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Account :		Land-building	1,40,000
C	80,000	Investments	70,000
S	70,000	Stock	50,000
T	1,00,000	2,50,000	Debtors	25,000
Workmen accident compensation fund	10,000	Cash	20,000
T's loan	25,000	Advertisement suspense account	15,000
Creditors	35,000
	3,20,000		3,20,000

T died on 30-6-2017. As per partnership deed, following accounting treatments are necessary to be given at the time of death of a partner:
(1) Interest on capital is to be allowed at 6% per annum.
(2) Interest on drawings is to be charged at 12% p.a. T withdrew Rs. 20,000 on 1-5-2017.
(3) Goodwill is to be valued at two times the average profit of the last three years. Profits for the last three years were: 2014-15 Rs. 80,000; 2015-16 Rs. 75,000 and 2016-17 Rs. 85,000.
(4) Profit share to be given on the basis of profit of previous year.
Prepare T's executor's account.
Answer:

T's Executor's Account is prepared as follows:
T's Executor's Account

Dr. Date	Particulars	Amt. (Rs.)	Cr. Date	Particulars	Amt. (Rs.)
30-6-17	To Advt. Suspense A/c	6,000	30-6-17	By T's capital A/c	1,00,000
30-6-17	To Drawing A/c	20,000	30-6-17	By Interest on capital A/c	1,500
30-6-17	To Interest on Drawings A/c	400	30-6-17	By Workmens' accident Comp. Fund A/c	4,000
30-6-17	To T's Executor's Loan A/c	1,76,975	30-6-17	To T's Loan A/c	25,000
			30-6-17	To Interest on T's Loan A/c	375
			30-6-17	To C's capital A/c (goodwill)	42,667
			30-6-17	To S's capital A/c (goodwill)	21,333
			30-6-17	To Profit and loss suspense A/c (Profit)	8,500
	2,03,375			2,03,375

Note:
(1) T's capital of Rs. 1,00,000 is credited to T's executor's account. Interest on T's capital for 3 months (April, May, June) at 6% p.a. is calculated as Rs. 1,00,000 x \(\frac{6}{100}\) x \(\frac{3}{12}\) = Rs. 1,500.
(2) T's loan of Rs. 25,000 is credited to T's executor's account. Interest on T's loan for 3 months (April, May, June) at 6% p.a. (as per Indian Partnership Act) is Rs. 25,000 x \(\frac{6}{100}\) x \(\frac{3}{12}\) = Rs. 375.
(3) T's share in the workmen's accident compensation fund is Rs. 10,000 x \(\frac{2}{5}\) = Rs. 4,000, distributed based on T's profit share.
(4) T's share in the Advertisement Suspense account is Rs. 15,000 x \(\frac{2}{5}\) = Rs. 6,000, which is debited to T's executor's account.
(5) New Goodwill: The average profit for the last three years = \(\frac{80,000 + 75,000 + 85,000}{3}\) = Rs. 80,000.
Goodwill of the firm = Average Profit x 2 = Rs. 80,000 x 2 = Rs. 1,60,000.
T's share in goodwill = Rs. 1,60,000 x \(\frac{2}{5}\) = Rs. 64,000. This amount will be contributed by C and S in their gaining ratio, which is 2:1. C contributes Rs. 42,667 and S contributes Rs. 21,333.
(6) T's profit share up to the date of death (3 months: April, May, June) is calculated based on the previous year's profit (Rs. 85,000):
Profit share of T = Rs. 85,000 x \(\frac{3}{12}\) (months) x \(\frac{2}{5}\) (T's share) = Rs. 8,500.
In simple words: This question involves preparing a deceased partner's executor's account by calculating and transferring all their dues, including capital, interest on capital and loan, share in funds, goodwill, and profit up to the date of death, while also accounting for their drawings and share in suspense accounts.

🎯 Exam Tip: When dealing with a deceased partner's account, meticulously calculate all accruals (interest, profit share) and deductions (drawings, share of losses/suspense) for the period up to their death. Ensure goodwill adjustments and fund distributions are correctly made as per the partnership deed and standard accounting principles.

 

Question 18. E, V and M are the partners of a firm sharing profit and loss in the ratio of 3 : 2 : 1. Balance sheet of their firm on 31-3-2016 was as under:

Liabilities	Amt. (Rs.)	Assets	Amt. (Rs.)
Capital Accounts :		Goodwill	24,000
E	1,20,000	Land-building	2,00,000
V	90,000	Machinery	60,000
M	1,00,000	3,10,000	Debtors	80,000
Investment reserve	10,000	Investments (Market value Rs. 26,000)	30,000
Bad debt reserve	6,000	Cash	40,000
Provident fund	70,000	Profit-loss A/c	42,000
Workmen profit sharing fund	30,000
Creditors	50,000
	4,76,000		4,76,000

V died on 1-10-2016. As per partnership deed, following was decided among partners:
(1) Goodwill is valued at Rs. 1,20,000.
(2) New profit-loss sharing ratio of E and M decided at 2 : 1.
(3) V is to be given profit share till the date of his death on the basis of the profit of last year.
(4) 10% reserve for bad debt to be provided on debtors.
(5) Land and building is valued 10% more.
(6) Rs. 1,000 salary per month is payable to V.
(7) Rs. 45,000 to be paid to V's executor immediately and balance amount in two equal yearly instalments with interest at 10% per annum.
Prepare V's executor account and executor's loan account till it is finally paid.
Answer:

The Revaluation Account, V's Capital Account, V's Executor's Account, and V's Executor's Loan Account are prepared as follows:
Revaluation Account

Debit Particulars	Amt. (Rs.)	Credit Particulars	Amt. (Rs.)
To Bad debts reserve A/c	2,000	By Land-Building A/c	20,000
To V's Salary A/c (1,000 x 6)	6,000
To Profit : Partners' Capital A/c
E	9,000
V	6,000
M	3,000	12,000
	20,000		20,000

V's Capital Account

Dr. Date	Particulars	Amt. (Rs.)	Cr. Date	Particulars	Amt. (Rs.)
1-10-16	To profit-loss A/c	14,000	1-10-16	By Balance b/d	1,20,000
1-10-16	To Goodwill A/c	8,000	1-10-16	By Investment Reserve A/c	2,000
1-10-16	To Profit and Loss Suspenses A/c	7,000	1-10-16	By Salary A/c	6,000
1-10-16	To Bank A/c	43,000	1-10-16	By E's Capital A/c (goodwill)	20,000
1-10-16	To V's executor A/c	1,00,000	1-10-16	By M's Capital A/c (goodwill)	20,000
			1-10-16	By Revaluation A/c (profit)	4,000
	1,72,000			1,72,000

V's Executor's Account

Dr. Date	Particulars	Amt. (Rs.)	Cr. Date	Particulars	Amt. (Rs.)
1-10-16	To Bank A/c	45,000	1-10-16	By V's capital A/c	1,00,000
1-10-16	To V's Loan A/c	55,000
	1,00,000			1,00,000

V's Executor's Loan Account

Dr. Date	Particulars	Amt. (Rs.)	Cr. Date	Particulars	Amt. (Rs.)
1-10-17	To Bank A/c	27,500	1-10-16	By V's Executor's A/c	55,000
31-3-18	To Bank A/c	28,875	1-10-17	By Interest A/c (10% on Rs. 55,000 for 1 year)	5,500
31-3-18	To Balance c/d	28,875	1-10-18	By Interest A/c (10% on Rs. 28,875 for 1 year)	2,888
	85,250			85,263

Note:
(1) Investment Reserve: The book value of investments is Rs. 30,000, and the market value is Rs. 26,000. The difference of Rs. 4,000 is adjusted against the investment reserve. The remaining balance of Rs. 6,000 from the reserve is distributed among the partners. V's share of this distributed reserve is Rs. 6,000 x \(\frac{2}{6}\) = Rs. 2,000.
(2) Profit and Loss Account (Debit Balance): The debit balance of the profit and loss account in the balance sheet is Rs. 42,000. V's share of this loss is Rs. 42,000 x \(\frac{2}{6}\) = Rs. 14,000, which is debited to V's capital account.
(3) Old Goodwill: The old goodwill of Rs. 24,000 shown in the balance sheet is written off. V's share in this is Rs. 24,000 x \(\frac{2}{6}\) = Rs. 8,000, debited to V's capital account.
(4) Gaining Ratio: The old profit-loss sharing ratio for E, V, and M is 3:2:1. After V's death, the new ratio for E and M is 2:1.
Gain = New share - Old share.
Gain of E = \(\frac{2}{3} - \frac{3}{6} = \frac{4-3}{6} = \frac{1}{6}\).
Gain of M = \(\frac{1}{3} - \frac{1}{6} = \frac{2-1}{6} = \frac{1}{6}\).
The gaining ratio for E and M is 1:1.
(5) Goodwill Share: V's share of goodwill is Rs. 1,20,000 x \(\frac{2}{6}\) = Rs. 40,000. This amount is contributed by E and M in their gaining ratio of 1:1.
(6) V's Profit Share up to Death: V died on 1-10-2016, so the period from 1-4-2016 to 1-10-2016 is 6 months.
Last year's profit was a loss of Rs. 42,000.
V's share in this loss = Rs. 42,000 x \(\frac{6}{12}\) (months) x \(\frac{2}{6}\) (V's share) = Rs. 7,000, which is debited to V's capital account.
(7) Salary to V: Salary of Rs. 1,000 per month for 6 months is Rs. 6,000, credited to V's capital account.
(8) Payment to Executor: Rs. 45,000 is paid immediately to V's executor, and the remaining balance is transferred to V's Executor's Loan Account, to be paid in two equal yearly installments with 10% interest.
In simple words: This complex problem details the accounting procedures for a deceased partner, including revaluation, goodwill adjustments, distribution of reserves and losses, interest calculations, and setting up an executor's loan account for deferred payments with interest.

🎯 Exam Tip: For problems involving a deceased partner, meticulously track all adjustments from the balance sheet and partnership deed conditions. Pay close attention to calculating profit/loss share and interest up to the date of death, and correctly setting up the executor's capital and loan accounts for periodic payments.

 

Question 19. A, T and M are the partners sharing profit and loss in the ratio of 4 : 1 : 1. Balance sheet of their firm on 31-3-2017 was as under :

Balance Sheet

Liabilities	Amt. (₹)	Assets	Amt. (₹)
Capital Accounts :		Land-building	12,000
A	15,000	Furniture	6,000
T	12,000	Motor car	8,000
M	9,000	36,000	Debtors	15,000
General reserve	3,000	Stock	6,000
Creditors	17,000	Loan to M	9,000
Bills payable	1,000	Cash	1,000
	57,000		57,000

M died on 1-7-2017. As per partnership agreement among partners :
(1) Land and building and furniture is to be increased by 10%.
(2) Cost of stock is Rs. 5,500, which is to be brought in the books.
(3) Rs. 400 to be written off as bad debt from debtors.
(4) Goodwill is valued at Rs. 7,200.
(5) M is to be given share in profit till the date of his death on basis of sales and net profit of last year. Sales of last year was Rs. 8,00,000. Sales of first three months of Current year was Rs. 4,00,000. Net profit of last year was Rs. 2,40,000.
(6) Rs. 1,850 to be paid to NTs executor in cash and balance amount in two equal annual instalments with interest at 12% interest per annum.
Prepare M's executor's account and executor's loan account till it is finally paid.
Answer:

Revaluation Account

Dr. Particulars	Amt. (₹)	Cr. Particulars	Amt. (₹)
To Machinery A/c	2,000	By Land-Building A/c	10,000
To O/s Salary A/c	2,000	By Investments A/c	5,000
To Profit: Partners Capital A/c		By Bad debts reserve A/c	1,000
A	6,000
T	4,000
M	2,000
	12,000
	16,000		16,000

M's Executor's Account

Dr. Date	Particulars	Amt. (₹)	Cr. Date	Particulars	Amt. (₹)
1-7-17	To M's Loan A/c	9,000	1-7-17	By M's capital A/c	9,000
1-7-17	To M's Executor's Loan A/c	21,850	1-7-17	By General Reserve A/c	500
			1-7-17	By Revaluation A/c(profit)	150
			1-7-17	By A's capital A/c(goodwill)	960
			1-7-17	By T's capital A/c (goodwill)	240
			1-7-17	By Profit and Loss Suspense A/c	20,000
	30,850			30,850

M's Executor's Loan Account

Dr. Date	Particulars	Amt. (₹)	Cr. Date	Particulars	Amt. (₹)
1-7-17	To Cash A/c	1,850	1-7-17	By M's Executor's A/c	21,850
31-3-17	To Balance c/d	21,800	31-3-18	By Interest A/c	\( 20,000 \times \frac{12}{100} \times \frac{9}{12} \) 1,800
		23,650			23,650
30-6-18	To Bank A/c	12,400	1-4-18	By Balance b/d	21,800
	(10,000+1800+600)		30-6-18	By Interest A/c	\( 20,000 \times \frac{12}{100} \times \frac{3}{12} \) 600
31-3-19	To Balance c/d	10,900	31-3-19	By Interest A/c	\( 20,000 \times \frac{12}{100} \times \frac{9}{12} \) 900
		23,300			23,300
30-6-19	To Bank A/c	11,200	1-4-19	By Balance b/d	10,900
	(10,000+900+300)		30-6-19	By Interest A/c	\( 10,000 \times \frac{12}{100} \times \frac{3}{12} \) 300
		11,200			11,200

Note :
(1) M's portion of the general reserve is calculated as Rs. 3,000 multiplied by his profit share (1/6), totaling Rs. 500.
(2) M's share of goodwill amounts to Rs. 1,200 (Rs. 7,200 multiplied by 1/6), which will be provided by partners A and T in their gaining ratio, equivalent to their old ratio of 4:1.
(3) M's profit share until his demise is determined by prorating the last year's profit based on sales up to the date of death, applied to M's profit sharing ratio. The calculation is: \( \frac{4,00,000}{8,00,000} \times 2,40,000 \times \frac{1}{6} = 20,000 \).
(4) Interest on capital is calculated at a 12% annual rate on Rs. 30,000 for a period of two months, resulting in Rs. 600.
(5) Loan interest is computed on Rs. 10,000 at a 6% annual rate for two months, yielding Rs. 100.
In simple words: This question involves preparing the executor's and loan accounts for a deceased partner, M, based on specified retirement conditions. Key steps include calculating M's share of general reserve, goodwill, and profit up to the date of death, along with any applicable interest, and then settling the total payable amount through cash and loan installments.

🎯 Exam Tip: When dealing with a deceased partner's account, pay close attention to the dates for calculating interest, profit share, and goodwill. Ensure all adjustments, including revaluation profits/losses and distribution of reserves, are correctly posted to the capital accounts before determining the final amount payable to the executor.